IRS Limits Combined Small Business COBRA Exemption

July 2, 2003 ( - Exemptions from Consolidated Omnibus Budget Reconciliation Act (COBRA) requirements of providing continuing health coverage will no longer be granted to smaller businesses that transfer stock and combine with another business to form a single employer with more than 20 employees.

Tax code Section 4980B exempts from COBRA small businesses normally employing fewer than 20 employees in the previous calendar year. Yet, if the transfer of stock causes the business to become a different business or at least part of one, the number of employees of both businesses during the previous year must be now considered in applying COBRA requirements, according to the Internal Revenue Service’s (IRS) Revenue Ruling 2003-70 as reported by Washington-based legal publisher BNA.

Employers that fall under these parameters that fail to comply with the COBRA requirements will be hit with an excise tax. For purposes of that tax, the ruling is effective for stock sales that take effect on or after July 7, 2003.

However, an exception still remains under a scenario in which a small business acquires substantially all of the assets of another business and continues the operations of the acquired business without interruption or substantial change. In that case, the IRS will not classify the business as a single employer with the seller of the assets, so the business remains exempt from COBRA requirements until the beginning of the year following the first year in which the business employs more than 20 employees.

The exception does not apply if the business is considered a successor employer to the seller of the assets. In that situation, the firm will have the obligation to make COBRA continuation coverage available to certain beneficiaries while otherwise being excepted from COBRA.

Revenue Ruling 2003-70 will be published in Internal Revenue Bulletin 2003-27, dated July 7, 2003.