A common, but important, mistake that business owners make when selling their business is failing to adequately investigate what their and their spouse’s health coverage will be after the sale of the business. Obviously, many prior owners will sell their business before they are eligible for Medicare leaving them facing the high costs of obtaining private individual insurance if their spouse is not covered under another group plan.
Commonly, as a potential solution, the prior owners will negotiate to stay on with the new owners as consultants under a consulting agreement or as employees under an employment agreement with the proviso that they be added to the new owner’s group health plan until the prior owners are eligible for Medicare or some other pre-negotiated timeframe.
The new owners under an agreement will simply add the prior owners onto the new owner’s group health plan thinking that the prior owner, now consultant or employee, will be covered. However, (i) most group policies will not provide health coverage for consultants and (ii) most group policies contain provisions which require the employee to work a minimum number of hours per week to be eligible for benefits. Many prior owners are under the false assumption that if their employment agreement or consulting agreement says that they are covered that they don’t have to worry. That is not the case.
It is important for both the buyer of a new business and the seller to contemplate early on in the deal negotiations the need for the Seller’s health coverage post closing. It also very important to discuss in detail with the new owner’s group health provider what coverage is available and what the specific requirements are to make sure that the prior owner has coverage.