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Must COBRA Coverage Be Offered by a Company With 15 Employees That Was, in the Previous Calendar Year, the Wholly-Owned Subsidiary of a Large Corporation?



QUESTION: Our company employs 15 people and sponsors a major medical plan that was established on January 1, 2020. In 2019, the company was a wholly owned subsidiary of a large corporation with over 100 employees. Now, the company is owned by an individual who has no connection with the former parent company, owns no other businesses, and has no other employees. One of our employees has resigned, effective April 15, 2020, and she has asked to elect COBRA coverage under our major medical plan. Is it true we do not have to offer her COBRA coverage because we have fewer than 20 employees?

ANSWER: It is unclear whether COBRA applies in this situation. Under COBRA’s small employer exception, a group health plan is not subject to COBRA for events that occur during a calendar year “if all employers maintaining [the] plan normally employed fewer than 20 employees on a typical business day during the preceding calendar year.” And in determining whether an employer employed fewer than 20 employees in the previous year, the employees of certain related employers must be counted. The rules about related employers are complicated, but they clearly require the employees of a parent corporation and its wholly-owned subsidiary to be counted together.

Thus, there is a good argument that COBRA applies to your company’s group health plan for events occurring in 2020 because, in 2019, your company and its parent corporation employed more than 20 employees. However, there is also an argument that COBRA should not apply because your company’s plan was not in existence during 2019. A technical reading of the statutory language, which requires counting the employees of all employers maintaining the plan during the preceding calendar year, could lead to the conclusion that there were no employers maintaining the plan during 2019 and therefore no employees to be counted. Under this approach, COBRA would not apply to your company’s plan for events occurring in 2020.

The best option is to consult with counsel concerning this gray area. In fact, we recommend seeking professional advice whenever deciding whether to take advantage of COBRA’s small employer exception because the rules for related employers are so complex. If a connection between entities or individuals is overlooked (which can easily happen), employees that should be counted may be omitted. If an employer mistakenly believes its group health plan is not subject to COBRA, lawsuits and ERISA statutory penalties may ensue. But even more serious for employers with insured plans (or self-insured plans with stop-loss coverage) is the uninsured COBRA liability an employer may face if its insurer has not agreed to provide COBRA coverage because COBRA is believed to be inapplicable. Changes in corporate ownership add another level of complexity, increasing the incentive to seek professional guidance.

For more information, see EBIA’s COBRA manual at Sections IV.C (“Small Employer Exception”) and XII (“COBRA in Mergers, Acquisitions and Other Business Reorganizations”).

Contributing Editors: EBIA Staff.

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