When a company is bought, sold, merged or reorganized, unexpected employee benefits issues may surface that can significantly affect the deal structure, liabilities, and future benefit plan design for the surviving entity and its employees.
Businesses involved in — or even exploring — such transactions should consider the following 10 questions early in the mergers and acquisitions (M&A) process.
Question 1: Does the seller have unionized employees and make contributions to a multiemployer plan
Multiemployer benefit plans are jointly sponsored between groups of employers or employer organizations and labor unions. If a seller makes contributions to such a plan pursuant to a collective bargaining agreement or participation agreement, both parties to a merger or acquisition should be aware of the potential liabilities. For example, the multiemployer plan may pursue the seller (and a controlled group or successor entity) for delinquency on plan contributions. In other circumstances, the closure of the business may trigger withdrawal liability owed to an underfunded pension fund for a business' share of the unfunded pension liabilities. This can often be a surprisingly large liability owed by the seller and to the buyer in either a stock sale or asset sale.
Question 2: Could the transaction inadvertently create a multiple employer plan or multiple employer welfare arrangement?
Distinct from multiemployer plans (as mentioned above), multiple employer plans (MEPs) and multiple employer welfare arrangements (MEWAs) are created when unrelated employers sponsor an employee benefits plan. These plans are often subject to greater administrative, reporting and compliance requirements, and may be subject to both federal employee benefits laws and state insurance laws. M&A transactions may inadvertently create non-compliant MEPs and MEWAs through controlled group issues, which can be costly to resolve if not identified early.
Question 3: Does the transaction involve potential controlled group issues?
Employee benefits plans are commonly subject to both the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA). These statues impose, among other things, various reporting, filing, notice and non-discrimination testing requirements on plans. These requirements apply very differently depending on whether the employer for the plan is part of a controlled group. However, the definition of controlled group is not identical between ERISA and the tax code. Controlled group issues (either inadvertently becoming part of a controlled group or failing to be part of one) could cause the plan to miss compliance requirements or inadvertently become part of a MEWA or MEP.
Question 4: Could the transaction cause unexpected tax consequences with deferred compensation?
When a company offers deferred compensation incentives — such as long-term incentive plans, stock options, severance plans, etc. — the recipients enjoy the benefits of tax deferral. However, an M&A transaction (and the attendant changes in employment) could trigger accelerated vesting or "payment of benefits" tax consequences under Section 409A of the Internal Revenue Code.
Question 5: Does the transaction give large payouts to certain executives, owners or highly compensated individuals in the event of a change in control?
Internal Revenue Code Section 280G imposes significant taxes on golden parachute payments when there is a company change in control. Those in an M&A transaction should determine whether Section 280G applies and whether the payments exceed the golden parachute threshold. If they do, there may be methods to remedy the issue and avoid negative tax consequences.
Question 6: Does the seller have misclassified employees?
Misclassified employees (such as employees vs. independent contractors, part time vs. full time, highly compensated vs. non-highly compensated, union vs. non-union) gives rise to a multitude of employment law and labor law issues. On the employee benefits side, classification often affects eligibility for benefits and, therefore, the employer's obligation to make withholdings, make contributions, and pay claims and benefits for eligible individuals.
Question 7: Will the transaction involve the termination or merger of a retirement plan?
Retirement plans are often merged or terminated because of an M&A transaction. The plan merger or termination process can be very involved, often requiring coordination with many plan professionals (i.e., recordkeepers, actuaries and consultants) over a long period of time.
Question 8: Does the seller sponsor an employee stock ownership plan (ESOP)?
ESOPs are tax-qualified retirement plans that invest in the sponsoring employer's stock. In asset purchases, ESOP participants have the right to direct the ESOP trustee to vote on the employer stock shares allocated to their accounts. Additionally, the sale of an ESOP company triggers several tax-qualification and ERISA fiduciary provisions. Whether you are navigating a merger, acquisition or restructuring, the complexities of employee benefits law demand specific legal expertise and foresight.
Question 9: Have the parties resolved how to allocate COBRA responsibilities?
An issue may arise with respect to the obligation to offer continuing coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). If the buyer does not acquire the seller's health plan, an issue emerges as to which party remains responsible for providing continuation coverage for health benefits to any COBRA-qualified beneficiaries. This is particularly relevant in the asset purchase context when the seller may be unable to offer COBRA without assets post-transaction.
Question 10: How will the parties address health insurance plans and obligations?
Terminating or transferring health and welfare benefits are typically easy compared to retirement plans, especially in situations when the benefits are fully insured (i.e., a group coverage policy purchased from an insurer). However, retiree and self-insured health plans represent potentially significant unfunded liabilities. Unlike a fully insured plan, the sponsor of a self-insured plan pays benefit claims directly and may be exposed to potentially large claims that could greatly alter plan funding even with a stop-loss policy as a backstop.
Overlooking Benefits Is a Risky Proposition
Given all the complexity surrounding an M&A transaction, companies should ensure they are not overlooking the issue of employee benefits. Those that fail to do so face substantial risks.
Originally published by WorldatWork.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
