Communication Compliance Employee Benefits U.S. Webcast

Introduction of Employee Benefits Compliance Issues for Mergers and Acquisitions

Anne Newhouse, CEBS

The mergers and acquisition (M&A) process can be lengthy with many considerations and implications that go beyond a purchase price. Often when an M&A is initiated, the principals of the organizations sign non-disclosure agreements (NDAs) while trying to learn as much about the other entity as they can, all while under a shroud of secrecy. As a result, the focus is on the big picture of a potential sale; specifics may not be addressed until a deal is concluded.

During M&A transactions, understanding the employee benefits programs of the entities involved is part of a sound strategy. However, employee benefits discussions are often not addressed until after everything is finalized, according to Katrina Veldkamp, partner at Boutwell Fay LLP. In a recent International Foundation webcast, “Introduction to Employee Benefits in Mergers and Acquisitions,” Veldkamp explained that the M&A process often overlooks retirement, health and welfare plan issues that can arise and emphasized why earlier involvement is better. The webcast provided an introductory overview of the M&A process and questions that benefits professionals should answer after the transaction.

What kind of sale is it?

M&As can consist of different structures depending on any number of factors, including the motivation of those involved and the circumstances. Transactions are either a merger or a stock or asset sale, often determined for tax or legal purposes, and can affect employee benefit plans.

Stock Sale

  • Purchase or sale of company equity
  • Full or partial purchase
  • Sold company stays intact under new ownership

Asset Sale

  • Purchase or sale of company assets and assumption of liabilities
  • Includes all or some of the assets and/or liabilities
  • Buyer doesn’t have ownership in seller
  • Seller of assets usually continues to exist
  • Employees and plans stay behind with the seller unless hired by the buyer
  • Most common type of M&A transaction

Mergers

  • Two companies combine
  • One company survives while the other ceases to exist
  • Surviving company employs all employees and sponsors all benefits plans

What considerations affect the timeline of M&As?

Although every situation is different, there is a general process for M&As and a timeline to follow. Appropriate planning—or lack of planning—can impact the length of the process.

Before the Transaction

  • Initial negotiations
  • Owners and consultants sign NDAs
  • Produce letter of intent
    • Outline basic terms and conditions of the deal
    • Often does not consider employee benefits
    • Set objectives

During the Transaction

  • Conduct due diligence
    • Document review, including financial records, contracts, property, etc.
    • Identify and assess risks or noncompliance issues, such as not filing Form 5500, Affordable Care Act (ACA) reporting, etc.
    • Produce a letter of intent with key dates as well as basic terms and conditions
  • Purchase agreement negotiations
  • Close the deal

After the Transaction

  • Ownership officially changes
  • Integrate IT systems, operations, employees, company cultures, employee benefits, etc.
  • HR and benefits teams are told of the sale if not already part of the process

Does the M&A create a related employer status?

For employee benefits purposes due to changes of ownership, it’s important to determine whether there are common ownership or shared services that could create a controlled group or an affiliated service group.

  • A controlled group is an organization that is related due to common stock ownership.
  • An affiliated service group is an organization that is primarily service-related and made up of a group of entities.

A related employer status determines how companies handle benefits, nondiscrimination testing, and participation requirements. Related employers could be a parent-subsidiary controlled group or a brother-sister controlled group.

Retirement plan compliance issues with an M&A

Understanding the complexities that impact retirement plans can be challenging. M&As often highlight the compliance issues and fiduciary responsibilities that need to be addressed during the due diligence process and, in most cases, prior to finalizing a sale. These include the following.

  • Determining whether plan documents are up to date, such as including language for SECURE 2.0 amendments
  • Understanding whether there have been nondiscrimination testing issues and whether there is proof of any corrections made
    • IRS 410(b)(6) transition period after a transaction
  • Contribution errors
    • Not making contributions according to plan terms
    • Late contributions or loan payments

For defined benefit plans, additional considerations include the following.

  • Understanding whether plan corrections were made in the last several years
    • Requesting copies of correction program applications from the IRS, DOL or other agencies
    • Sometimes needing corrections in the due diligence process prior to closing a deal
  • Government agency audits
    • Requesting copies of audit correspondence with the IRS, DOL, PBGC or others
  • Missing Forms 5500
  • Missing ERISA fidelity bond

Retirement plan questions for M&As

Whether the M&A is a stock or asset purchase will affect what happens to retirement plans after a sale. When both the buyer and seller have retirement plans, the parties should agree on how to handle these plans prior to finalizing the sale. Additional questions to answer include:

  • Will existing plans continue?
  • Will a plan or plans be terminated?
  • Will plans be merged? If so, which plan features will remain?
  • Will plans be frozen?
  • What will employees expect?
  • How will outstanding participant loans be handled?
  • What details or promises were included in the purchase agreement?
  • Are there union plans involved? Will changes to plans need to be negotiated?
  • Who will be responsible for terminating or merging the plans based on the language in the purchase agreement?
  • Are plan amendments needed?
  • Do payroll systems need updating?

Health and welfare plan compliance issues with an M&A

Like retirement plans, health and welfare plans require thoughtful consideration during the M&A process. Addressing any potential drawbacks or liabilities, compliance and reporting requirements, and administrative obligations of the parties will be crucial to a smooth transition. The companies should take the time to understand the types of plans already offered and if those plans will fit into the buyer’s existing employee benefits programs.

A list of compliance considerations should include the following.

  • Plan documents and summary plan description (SPD)/wrap document
    • Are they easily accessed and up to date?
    • Section 125 plans/cafeteria plan documents
  • Missing required participant disclosures
    • Summary of benefits and coverage (SBC)
    • COBRA
    • Medicare Part D Creditable Coverage
    • HIPPA Notice of Special Enrollment Rights
    • Children’s Health Insurance Program (CHIP) Notice
  • Affordable Care Act (ACA) reporting and disclosure, applicable large employer (ALE) and grandfathered plan status
  • Mental Health Parity and Equity Addiction Act (MHPAEA) analysis
  • Self-funded health plan
    • Stop-loss insurance
    • Large claims being managed or watched
    • Actuarial review liabilities for risk
    • Plan designs, network, pharmacy benefits manager (PBM) contracts and formulary
  • Missing Form(s) 5500
  • Nondiscrimination testing and results

Health and welfare questions for M&As

As with retirement plans, health and welfare plans also have plenty of complexity. A starting point for dealing with these plans could be to set goals, a budget and a communications strategy. It’s also important to focus on key issues and questions about the existing plans. Some of the questions to answer include:

  • Will plans be kept separate or combined?
  • Does the buyer have control over the eligibility for the seller’s employees?
  • Who will be communicating with service providers like the third-party administrator (TPA) for a self-funded plan or the insurance company for a fully insured plan and discuss the options for combining plans and employees?
  • What is the related employer status?
  • Do the unrelated employers participating in a single health plan create a multiple employer welfare arrangement (MEWA)?
  • Who will be updating plan documents?
  • Who will be focused on ACA reporting and disclosure requirements, if any?
  • Who will be liable for COBRA coverage? Are there employees already on COBRA who need to be considered?
  • Are flexible spending accounts (FSAs) and dependent care FSA plans going to be continued? Will there be mid-plan-year election opportunities?

Key Takeaways for Employers

  • Consider employee benefits from the beginning as part of the due diligence process.
  • Get legal counsel involved—specifically related to employee benefits.
  • Discuss with service providers how plans will be affected post-merger.
  • Understand the type of sale transaction, ownership structure, and controlled group status as well as how these factors will impact employee benefits.
  • Communicate anticipated employee benefits changes to both benefits professionals and employees.

Learn more in the webcast recording about other introductory mergers and acquisitions issues. Visit the Benefits Knowledge Center to view our InfoQuick entitled General Benefits: Mergers and Acquisitions—Benefits Issues.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.

Anne Newhouse, CEBS

Information/Research Specialist at the International Foundation of Employee Benefit Plans Favorite Foundation Service: The Information Center! Members having the ability to have an information specialist research their topic is a great benefit. Favorite Foundation Moment: Attending the 2013 CEBS conferment ceremony in Boston as an official CEBS graduate. Benefits Related Topics That Interest Her Most: Benefit communication—helping employers understand what employees want and the way they want it communicated to them. Personal Insight: Anne may spend her days in the International Foundation employee benefits library, patiently researching answers to member questions—but after work, she’s ready to move with a bike, hike or walk in the great outdoors.

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