In a company acquisition or the outsourcing of a business line, group health insurance rarely makes the front page: the transaction checklist is headed by employment contracts, salaries and IT systems. Yet on the day of the transfer, employees typically ask two things: whether they keep their jobs, and whether they keep their benefits. The Labour Code answers the first question but not the second: the employment relationship transfers, but the insurance contract is a transaction between the old company and the insurer. This article goes through what transfers and what does not, what the difference is between a change of ownership, a merger by absorption and outsourcing, and what HR needs to do for the cover to remain continuous.
- Under Section 36(1) of the Labour Code (Mt.), when an economic unit is transferred by a legal transaction, the rights and obligations arising from the employment relationship pass to the transferee – the group health insurance contract, however, is a contract between the old company and the insurer and does not transfer by itself.
- In a purchase of a business quota or shares, the policyholder does not change; in a merger by absorption or other merger, the legal successor as a general rule takes over the contracts; when a site is taken over or activities are outsourced, the transferee typically has to take out its own contract, with the details set by the insurer's conditions.
- HR's tasks are notifying the insurer, sorting out the two groups of insured persons and the package levels, avoiding a restart of the waiting period (whether continuous prior cover is credited differs from insurer to insurer), harmonising the benefits policy and informing employees in advance.
What does the Labour Code say – and what does it not?
Under Section 36(1) of Act I of 2012 on the Labour Code (Mt.), the rights and obligations arising from employment relationships existing at the time an economic unit – an organised grouping of material or non-material resources – is transferred by a legal transaction pass from the transferor to the transferee employer. Section 37 requires the transferor to inform the transferee, before the transfer, of the rights and obligations arising from the employment relationships concerned; under Section 38(1), the transferee informs the employee in writing, on the day of the transfer, of the change in the person of the employer, and under subsection (2) – if there is no works council or works representative at the transferor – those concerned must be informed in writing at least fifteen days before the transfer of its date and reason, the legal, economic and social consequences for them, and the measures planned. The fate of the benefits package typically falls within this scope. Under Section 39, the transferor and the transferee are jointly and severally liable for employee claims that fell due before the transfer if the employee enforces the claim within one year of the transfer.
What the Mt. does not say is that the group health insurance transfers as well. The logic of group insurance is that the insured persons belong to the group on the basis of their relationship with the policyholder – here, the employment relationship – but the contract itself exists between the employer and the insurer and is not part of the employment relationship. If the employment contract or the benefits policy sets out the insurance as a benefit to which the employee is entitled, the related entitlement may pass to the transferee on the employment-law side – but the contract whose policyholder is the old company does not; the two are not the same thing, and this is worth clarifying with the employment lawyer handling the transaction.
Three cases, three different situations
- Purchase of a business quota or shares. The company remains the same, only its owner changes: the policyholder does not change, and the group contract continues. The tasks concern the future instead – if the new owner brings its own benefits standard, it is worth reflecting it in the contract at the next renewal date; the expectations of international parent companies are covered in a separate article of ours.
- Merger by absorption, merger, transformation. Under the rules of the Hungarian Civil Code (Ptk.) on legal persons (Sections 3:39 and 3:44), the successor is, as a general rule, a universal legal successor: the contracts of the company that ceases to exist – including the insurance contract – pass to it. With the insurer, the tasks in this case are updating the policyholder's details, keeping premium payments continuous and – if both companies had a contract – merging the two groups of insured persons; the conditions typically also require changes in the policyholder's details to be notified.
- Transfer of an economic unit, sale of a site, outsourcing. Here there is no universal succession: the employment relationships transfer under Section 36 of the Mt., but the insurance contract stays with the transferor, and the transferred employees – since they are no longer employed by the policyholder (their employment has not ended but has passed to the transferee) – typically drop out of the group of insured persons under the conditions. The transferee has to take out its own contract or extend its existing one; whether the insurer handles a change in the person of the policyholder by amending the contract or by concluding a new one differs by insurer and by conditions.
HR tasks with the insurer: notification, merging contracts, waiting period
The first step on both sides is to notify the insurer in writing of the date of the transfer and the number of people concerned: at the transferor this is a leavers' report, at the transferee a joiners' report – the monthly routine is described in our article on reporting joiners and leavers. If the transferee already has group health insurance, three questions have to be decided: whether there should be one contract or two (two parallel contracts mean two renewal dates, two indexations and two sets of administration, so merging them is typically advisable), with which insurer and at what package level, and from when. The biggest risk is the waiting period: the conditions typically impose a waiting period on new joiners, and if the transferred colleagues enter the transferee's contract as “new joiners”, the question of ongoing treatments and of illnesses already covered before may be reopened. The takeover terms – crediting previous, continuous cover against the waiting period and the handling of pre-existing conditions – differ from insurer to insurer and are not granted automatically: they must be requested in writing and recorded in the contract. A detailed list on this, on timing and on the points to request is given in our article on switching insurers; the logic is the same in a succession.
Different package levels and harmonising the benefits policy
If the two companies provided different package levels, after the transfer two groups of entitled employees exist side by side for a while – and this quickly creates tension among staff. There are two constraints on harmonising the levels. One is employment law: the benefit may be differentiated according to objective criteria set out in the policy – job role, organisational unit, management level – and not according to which company someone came from; levelling up is typically simpler, while levelling down raises the question of an adverse change in working conditions, which is worth thinking through with an employment lawyer. The other is tax: the favourable tax treatment requires a genuine group scheme with an undivided premium, where the part of the premium attributable to one insured person cannot be determined even by apportionment, so harmonisation has to be done at contract level, group by group, not with individual exceptions. The process of changing levels – from when, with what waiting period, who handles it – is described in our article on changing package levels, and the procedure for updating the policy in our guide to updating the benefits policy; a succession is precisely the kind of event that requires the policy to be rewritten.
Outsourcing: outsourced colleagues and treatments already under way
In outsourcing, from the transferring company's point of view the outsourced employees are leavers: their employment with the transferor ends, and with it, under the conditions, typically their status as insured persons too – the consequences of leaving are described in our article on cover when an employee leaves. Whether the new employer – the service provider – takes out group health insurance for them is its own decision, unless the benefit is a term of the employment relationship that transfers under Section 36 of the Mt.; if the company considers it important that its colleagues do not lose the benefit, it is worth settling this in the outsourcing contract itself. Ongoing care needs particular attention: what happens to surgery already ordered or treatment already started is governed by the conditions, and whether the insurer completes it after the employee leaves differs from insurer to insurer – it is worth clarifying this with the insurer before the transfer and informing the employees about it separately.
What should HR do before the transaction?
During due diligence, put group health insurance on the list as well: policyholder, insurer, renewal date, package levels, headcount, waiting periods, ongoing care. In the fifteen-day advance information under Section 38(2) of the Mt. – addressed to the employees where there is neither a works council nor a works representative – include what happens to the benefit: what stays, what changes, and from when; if there is a works council, under the Mt. it is the works council that must be informed and consulted in advance. Notify the insurer before the day of the transfer, and request the takeover terms for the transferred colleagues in writing. In a merger by absorption, record the updating of the policyholder's details, and where there are two contracts, the timetable for merging them; in outsourcing, settle the future of the benefit in the outsourcing contract. Finally, rewrite the benefits policy and the employee information sheet for the new situation. If you get in touch before the transaction, we help where we can.
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Sources
- Act I of 2012 on the Labour Code (Mt.) – Section 36(1) (change in the person of the employer, transfer of an economic unit), Section 37 (the transferor's duty to inform), Section 38(1)–(2) (written information to employees, fifteen-day advance information), Section 39 (joint and several liability)
- Act V of 2013 (Hungarian Civil Code, Ptk.) – Section 3:39 (transformation: universal legal succession), Section 3:44 (merger: amalgamation and merger by absorption; the universal legal successor of the absorbed legal person is the other legal person), and the rules on insurance contracts and group insurance
- Act CXVII of 1995 (Personal Income Tax Act, Szja tv.) – Section 3 point 89 b), Section 70(6) b) (tax treatment of group insurance premiums: undivided premium – specific defined benefit; individualised premium – employment income)
- NAV (Hungarian tax authority) – Taxable insurance premium (guidance, 14 May 2020): the premium of a genuine group risk insurance with an undivided premium is a specific defined benefit; a premium that can be determined per insured person is income under the legal relationship
