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A Service of OnQue Technologies, Inc. |
| IRS Issues COBRA Revenue Ruling: When small employers receive stock or acquire assets, how are employees counted for
COBRA? |
July 15, 2003
Santa Rosa, CA |
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A
new Internal Revenue Service (IRS) ruling, Revenue Ruling 2003-70, addresses COBRA administration for small-employer
plans in two situations: the acquisition of another entity through the transfer of stock and the acquisition of the
substantial assets of another business. Each of these situations -- stock transfer and asset acquisition -- is treated
differently under the ruling, which became effective for stock transfers and asset acquisitions that occur on or after
July 7, 2003. This COBRA Tip explains how the new Revenue Ruling affects COBRA requirements for some small
employers.
Small employer
exception: Generally, an employer is exempt from COBRA administration if it had fewer than twenty employees on at
least fifty percent of its typical business days in the entire previous calendar year. (The IRS refers to these
COBRA-exempt employers as "small-employer plans.") But the small-employer test is not as easy to apply as first
appears: What is a "typical" business day? How are part-time employees counted? What period should be used for
determining the number of employees? Are nonresident alien employees counted?
First we'll discuss the new IRS Revenue Ruling, which affects small employers involved in stock transfers or
acquisition of assets, and then we'll explain how employees are to be counted when determining whether an employer is
subject to COBRA administration.
Revenue Ruling 2003-70: The new
Revenue Ruling affects small employers that either receive all the stock of another company through stock transfers, or
that acquire the substantial assets of another company.
- Transfer of stock. Company P maintains
a group health plan, but normally employs fewer than twenty full-time employees. During the current calendar year, the
stock of Corporation O is transferred to Company P. As a result of this transfer of stock, Company P and Corporation O
are now considered by the IRS to be a single employer, and the number of workers employed by P and O combined in the
previous calendar year was at least twenty.
Issue. When, as a
result of a stock transfer, two previously separate employers are treated as a single employer, how is the number of
employees determined for purposes of COBRA requirements if one or more of the entities was a small employer?
IRS ruling: When determining whether the new company is subject to
COBRA requirements, the number of employees of both companies during the previous calendar year should be counted
together. If the combined number of employees is twenty or more, COBRA must be offered as of the date of the stock
transfer. In the example of Company P, the newly formed company must offer COBRA immediately because the combined
number of employees in the previous calendar year was twenty of more.
- Asset acquisition: Company R maintains
a group health plan, but normally employs fewer than twenty full-time employees. During the current calendar year, R
acquires substantial assets of another business and continues the business operations associated with those assets
without interruption or change. (Substantial assets are defined as a plant, a division, or substantially all of the
assets of a trade or business.) The combined number of workers employed by R and the acquired business during the
previous calendar year was at least twenty.
Issue: When an employer
acquires the substantial assets (such as a plant or division, or substantially all of the assets of a trade or
business) of another entity, how is the number of employees determined for purposes of COBRA requirements if the
acquiring employer was a small employer?
IRS ruling: Unlike the first
situation in which stock was transferred from one company to another to create a new single entity, the acquisition of
assets does not create a single entity. Therefore, company R's group health plan continues to be excepted from the
requirements of COBRA until January 1 of the year following a year in which it employs at least 20 employees during
fifty percent of that year.
Note: This example, in which
Company R acquires substantial assets of another company, should be distinguished from the situation in which the
acquiring company is considered by the IRS to be a successor employer to the seller of the assets. The IRS explains
that a buyer of substantial assets is not considered a successor employer unless the buyer continues the business
operations associated with the purchased assets without interruption or substantial change and the seller ceases to
provide any group health coverage, including COBRA, to any employee. Under these circumstances, even though Company R
would still be a small employer for COBRA purposes, it's group health plan would have to make COBRA continuation
coverage available to the seller's qualified beneficiaries in accordance with IRS mergers and acquisition
rules.
How to count employees for COBRA purposes:
Employers who had at least twenty full-time employees on fifty percent of the
business days in the previous calendar year are subject to the federal requirements of COBRA administration. Here are
the basic rules for counting the number of employees when determining if an employer must offer COBRA benefits:
- All full-time and part-time employees are
counted when determining if an employer had at least twenty employees in the previous calendar year.
- Part-time employees are counted as fractions of
full-time employees based on the number of hours worked by full-time employees in that business. For example, if a
full-time employee normally works a 6-hour day, then two part-time employees each working three hours a day equal one
full-time employee.
- Employers may use either a daily period or a
pay period as the basis on which to count these employees. But whichever period is chosen, it must be used uniformly
for the entire year.
- If the number of employees is determined on a
daily basis, each full-time employee is counted as one employee. A full-time employee works the number of hours (up to
8 per day, 40 per week) considered normal for that business.
- If the number of employees is determined on the
basis of a pay period, the employer must count the number of full-time employees working during that period, plus the
number of part-time employees and the hours worked by each during that entire pay period.
- Only "common-law" employees are counted -- not
independent contractors, self-employed persons and corporate directors - even if these individuals receive employee
benefits, such as being covered on the group health plan.
- Common law employees who are nonresident aliens
must be counted when determining whether an employer is subject to COBRA requirements.
For the full text of this new revenue ruling, go
to: IRS Revenue Ruling 2003-70 |
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This information is provided by
OnQue Technologies, Inc. for educational purposes only and does not constitute
legal advice. If legal advice or other professional assistance is required, the
services of a competent professional should be sought.
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