When an employer files for bankruptcy, it has no obligation to continue its group health plan. This applies whether the employer files a Chapter 11 bankruptcy to reorganize or a Chapter 7 bankruptcy to liquidate and dissolve the company. The obligation to offer COBRA depends on whether the employer still has a group health plan under which to provide continuation coverage.
In Chapter 11 reorganization, the company may or may not choose to continue the group health care plan based on the business need and financial resources. If continued, the plan will operate according to the plan document and all COBRA obligations remain intact. However, if the company decides to terminate the group health plan and no other plan exists, all coverage and all COBRA obligations cease.
In a Chapter 7 bankruptcy, the company is dissolved. There is no longer an employer and no longer any health plan and thus no COBRA obligation. In this situation and in a Chapter 11 bankruptcy when the employer chooses to discontinue all group health plans, employees will have to seek other coverage. Other coverage may be available by converting the employer's group health coverage to an individual policy. The employee may also have rights to special enrollment in a spouse's employer's plan, or by being an "eligible individual" who is guaranteed access to individual insurance. Union members who are covered by a collective bargaining agreement that provides for a medical plan may be entitled to continued coverage.
COBRA regulations and the U.S. Bankruptcy Code include specific provisions for retirees who retired on or before the filing and participated in the group health plan at the time of the bankruptcy filing. In a Chapter 11 reorganization, an employer is not permitted to terminate retiree health plans unless it receives court approval or until the conclusion of the reorganization. The bankrupt employer may be required to continue health coverage for retirees who lose their retiree medical coverage. The COBRA rules include a special qualifying event rule under which a bankrupt employer is required to offer retirees (and their dependents) the right to continue health coverage under COBRA if retiree medical coverage is substantially reduced or eliminated within one year of the bankruptcy filing. COBRA rules do not describe the type of coverage that must be provided to retirees although presumably the obligation can be satisfied if affected retirees are offered coverage similar to that provided to active employees. If the special bankruptcy qualifying event rule applies, the employer must continue the COBRA coverage for the retiree's lifetime and coverage cannot be terminated on account of Medicare entitlement. If a spouse or dependent survives the retiree, the employer generally must continue the spouse or dependent's COBRA coverage for 36 months after the date of the retiree's death. Any asset purchaser or successor to the bankrupt estate retains the obligation to offer COBRA coverage to the retirees.
Employers must seek legal counsel for bankruptcy decisions, particularly regarding eliminating retiree medical plans under Chapter 11 reorganization.