Benefits due diligence in an acquisition

Informational exploration, not individualized legal, tax, accounting, or fiduciary advice.

I built and sold a health insurance agency, then spent two years in insurance M&A. Licensed insurance agent since 2014. The checklist below is the health and welfare pass I use with CFOs and fractional CFOs on companies of 50 to 500 employees. It is not a substitute for deal counsel, tax counsel, or the company’s accountant. Background is on about Matt Ragudo.

Stock purchase or asset purchase

Stock purchase. You buy the entity. The employer does not disappear, and the group health plan usually stays in place. People who keep working for that entity do not, by the stock sale alone, have a termination of employment. Unpaid claims, stop-loss lasers, and the renewal calendar come with the company. A plan freeze or a termination has to be its own decision. It does not happen because the cap table changed.

Asset purchase. You buy assets, such as a plant, a division, or substantially all of a trade. The seller’s employees tied to those assets generally stop being the seller’s employees. Coverage under the seller’s plan is what creates the COBRA question in the next section. The buyer’s own plan, if those people are hired, is a new eligibility event under the buyer’s rules, not an automatic continuation of the seller’s deductibles and accumulators unless the buyer’s plan says so.

The funding labels travel either way. Fully insured is a premium. Level funded and self funded can be a liability. The comparison is on level funded vs fully insured.

COBRA and M&A qualified beneficiaries

26 CFR 54.4980B-9 is the regulation. The useful pieces for a CFO are these.

An M&A qualified beneficiary is someone whose COBRA qualifying event happened before or in connection with the sale, and whose last employment before that event was with the acquired organization (stock) or with the assets being sold (assets). People already on COBRA from that employment are in the group. Someone whose first qualifying event is unrelated to the deal is not automatically an M&A qualified beneficiary of this sale.

Stock sale. A person who works for the acquired company before the sale and keeps working there after the sale does not have a qualifying event because of the sale (Q&A-5). COBRA from the transaction itself is about people who actually lost the plan, including those already in a COBRA window tied to that employer.

Asset sale. A covered employee whose work was tied to the assets generally has a termination with the seller, and that is a qualifying event, unless the buyer is a successor employer and employs them immediately after the sale, or they do not lose the seller’s group health plan (Q&A-6). Hiring them onto the buyer’s plan does not, by itself, erase the seller-side event.

Which plan must offer the coverage. If the selling group still maintains a group health plan after the sale, a plan of the selling group has the COBRA obligation for M&A qualified beneficiaries (Q&A-8). If the selling group stops providing any group health plan to any employee in connection with the sale, the obligation can move. In a stock sale it moves to a plan of the buying group. In an asset sale it moves when the buyer is a successor employer, meaning it continues the business operations tied to those assets without interruption or substantial change.

The purchase agreement can allocate the work to either party (Q&A-7). If the party who took the allocation fails to perform, the party who has the Q&A-8 obligation still has it. A sentence in the contract is not the end of the duty.

Neither a stock sale nor an asset sale changes COBRA rights for periods before the sale.

Applicable large employer status after close

The carrier’s small-group or large-group line is not the IRS test. An applicable large employer is an employer that averaged 50 or more full-time employees, including full-time equivalents, in the prior year. IRC Section 4980H treats a controlled group as one employer for that count. The aggregation rules are in IRC Section 414: parent and subsidiary, brother-sister common control, and affiliated service groups.

A stock sale can move the target into the buyer’s controlled group, or out of the seller’s. The combined headcount can create applicable large employer status that neither side had alone, or it can change which entity is in the group that already had it. The year the status applies follows the IRS prior-year average, not the closing date on the purchase agreement. Have tax counsel run the combined count. The plain-English version of the test, separate from this deal page, is applicable large employer.

The offer rules that follow status, affordability and annual reporting, are tax and plan-sponsor work. This page only flags that the deal can change the count.

Liabilities a premium invoice will not show

Self-funded and level-funded plans can carry a balance sheet item the indemnity premium does not.

• Unpaid IBNR. Care already delivered, not yet billed or paid. On a self-funded plan it is the company’s accrued liability. How to think about the reserve is on self funding for 50 to 500 employees.
• Run-out claims. Incurred before close, or before a plan termination, and paid after. Ask who funds them on day one after closing.
• Terminal stop-loss. A policy written on an incurred-and-paid basis may not respond to claims paid after the policy ends. Run-out or terminal coverage is often optional. If it was not bought, the tail is uninsured. Contract basis, including 12/12 and 12/15, is on stop-loss basics.
• Level-funded surplus or deficit at a mid-year stop. The monthly amount is fixed. The contract still has a terminal accounting. Surplus is often forfeited if you end early. A deficit inside the employer’s layer can be due on termination. Read the termination section before you treat a level-funded plan as a clean premium you can drop at close.
• Lasers already set for next year. A higher specific deductible on one person can be in the renewal you have not been shown. Ask for the stop-loss renewal, not only the current policy.

None of these is a reason to invent a reserve number in the model. They are a reason to put a range in the purchase agreement and to have the accountant and stop-loss paperwork in the data room.

Broker compensation on Schedule A

Form 5500 Schedule A is where an insurance carrier reports commissions and fees on a welfare plan’s insurance contracts. Pull the filing before close. Form 5500 search is how you find it by EIN. The sponsor name on the filing may be a parent, not the name on the door.

Schedule A will not always show the whole arrangement. A self-funded plan that pays an administrator from general assets may have no insured medical contract, so the administration fee may be missing. Stop-loss is often insured and can have its own Schedule A. Ask for the broker service agreement and the compensation disclosure beside the filing. The public form is the outside number. The agreement is the current one.

Pay on a current engagement is carrier commission, often set in the rates the carrier files with the state. Every dollar paid on the contract is disclosed in writing, in dollars and per employee, before the plan goes through, for the current plan and every option quoted.

The first renewal after close

The plan year does not reset at closing. If the renewal is 40 days out, you inherited a deadline, not a fresh one. The latest start for a full cycle is 150 days before renewal. Inside that window, do the shorter version on purpose: funding type, stop-loss terms, claims if they exist, and broker pay, before anyone accepts the renewal.

For employers with 100 or more employees, steps 2 to 7 of the work are the Renewal Control Plan. It models fully insured, level funded, and self funded before the next plan goes through. Employers with 50 to 99 employees get the same seven steps without that name. The size guide is group health insurance for 50 to 500 employees.

Put the renewal date, the funding type, and the stop-loss carrier’s notice timing on the closing checklist next to the working-capital peg. A health plan left to “whoever the broker is” is how the first renewal becomes a surprise in the model you already showed the board.

Informational exploration, not individualized legal, tax, accounting, or fiduciary advice. Call (808) 358-1477 or email aloha@mattragudo.com.

Does a stock purchase end the target's group health plan?

Usually no. The corporation continues, and so does the plan, unless the deal says otherwise. Under 26 CFR 54.4980B-9, a covered employee who keeps working for the acquired organization does not have a COBRA qualifying event merely because of the stock sale. You still inherit unpaid claims, stop-loss terms, and the next renewal.

Who provides COBRA after an asset sale?

If the selling group still maintains a group health plan, that plan generally must offer COBRA to M&A qualified beneficiaries. If the seller stops providing any group health plan to any employee in connection with the sale, and the buyer continues the business operations without interruption or substantial change, the buyer’s plan can have that obligation. The purchase agreement may allocate the work. If the party who took it fails, the party with the regulatory obligation still has it.

Can the deal change applicable large employer status?

Yes. IRC Section 4980H counts the controlled group together, using the aggregation rules in IRC Section 414. The threshold is 50 or more full-time employees, including full-time equivalents. A stock sale can put the target in the buyer’s group. Status for a year generally uses the prior year’s average, so the combined count is a tax question, not a carrier’s rating label.

What health plan liabilities do not show up as a premium?

On a self-funded or level-funded plan: unpaid incurred-but-not-reported claims, run-out claims, terminal stop-loss that was never purchased, and a level-funded surplus or deficit when the contract ends mid-year. Surplus may be forfeited. A deficit may be due. The contract, not a headline rate, decides it.

Where do I see what the broker was paid?

Form 5500 Schedule A is the carrier’s report of commissions and fees on insurance contracts. How to read it is on the Schedule A page, and how to find the filing is on the Form 5500 search page. A self-funded administration fee may not appear the way an insured commission does. Ask for the service agreement as well as the filing.

What should happen at the first renewal after close?

The renewal date does not move because the deal closed. Read funding, lasers, and claims before you accept it. If close is inside 150 days of renewal, the full cycle is already short. For employers with 100 or more employees, the Renewal Control Plan models fully insured, level funded, and self funded before the next plan goes through.

I built and sold a health insurance agency: grew it to 60 agents in about 3 years, then sold it. Licensed insurance agent since 2014: Texas license 2501238, NPN 17369817.