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Don't Forget About Benefits During An M&A Transaction

Jun 26, 2019 6:30:00 AM

Today we’re sharing insight from guest blogger, Robert Kistler, an attorney at Barrett McNagny. We hope you enjoy Robert's wisdom and perspective.

M&A and EB - BlogWith mergers and acquisitions, employee benefit plans and transition issues are often among the last things considered when negotiating the purchase agreement terms or conducting due diligence. Given the complexity of maintaining and administering plans in compliance with numerous laws (ERISA, the Internal Revenue Code, ACA, COBRA, HIPAA, FMLA, ADA, GINA [1], and some state insurance laws—that are regulated by countless government agencies) it is no surprise that buyers, and sellers, are often surprised by complicated benefit issues that arise shortly before the transaction closing date.

There are two main types of M&A transactions: stock purchases and asset purchases. The potential benefits and transition issues, as well as the options and solutions to those issues, differ dramatically depending on the type of transaction. It is important for each internal and external benefit adviser to understand the type of transaction before addressing M&A-related benefits questions and issues.  

stock purchase transactions

With these transactions, the buyer purchases the seller's equity ownership interest—usually shares of corporation stock or a membership interest in an LLC. Upon closing, the buyer purchases the seller’s ownership interest, essentially "stepping into" the seller's shoes and continuing to operate the same legal entity, sponsoring the same employee benefit plans for the company’s employees. At closing, the buyer becomes the sponsor (and usually the plan administrator) for each seller-sponsored benefit plan. The buyer employs the seller's employees and generally operates under the same federal employee identification number. Thus, to the seller's insurers, third party administrators, insurance agents, brokers, and advisers (as well as the IRS, the DOL, the EEOC, and state insurance regulators), the target company continues operating as the same legal entity. 

Once a stock purchase transaction closes, the buyer's ability to amend or terminate certain seller-sponsored plans (particularly 401(k) plans) may be substantially limited. Thus, buyers must consider whether the purchase agreement should require the seller to terminate any plans effective before the closing date (though payment of claims incurred before closing and benefit distributions will likely continue after the closing date). 

asset purchase transactions

With these transactions, the buyer purchases some, or all, of the seller's assets, rather than the seller's ownership interest in the legal entity that owned the assets before closing. On closing, individuals operating the seller’s assets typically terminate their employment with seller, though the buyer often hires some or all the seller’s employees. Unlike a stock purchase, the buyer in an asset purchase does not automatically assume sponsorship of the seller's employee benefit plans. As a result, the parties must understand and negotiate whether the buyer will offer employment to any of the seller's employees and whether the buyer intends to sponsor any of the same benefit plans on the closing. 

One thing to remember…insurers, reinsurers, TPAs, and third-party benefit vendors are not parties to and are not bound by the asset purchase agreement. The parties must coordinate with the seller's (and perhaps the buyer's) brokers, advisers, and TPAs to determine whether any of seller’s insurance policies, or benefit plan administration agreements, may be assigned to the buyer. IF the seller sponsors "grandfathered" group coverage (which is not subject to all the ACA’s requirements), buyers usually cannot continue the seller's grandfathered health plan.  COBRA and employment issues may also be more complicated in an asset purchase.

In addition to the differences between stock and asset purchases, the parties must address numerous other M&A benefit-related issues, including: 

  • Notifying insurers and administrators for each benefit plan of the transaction
  • Onboarding the “new” M&A employees and benefit enrollment or transition
  • Payroll, withholding, and W-2 reporting
  • COBRA continuation notices for participants losing medical, dental, and/or vision coverage
  • Life insurance conversion notices for participants losing group life insurance coverage
  • Coverage and employment for individuals on FMLA and other leaves of absence on the closing date
  • Filing applicable annual reports (Forms 5500) for the seller’s continuing and terminated plans
  • Understanding potential changes to each party’s ACA employer reporting
  • Nondiscrimination testing or transitional relief applicable to each party’s benefit plans
  • Changes to each party’s controlled group (of related companies under common ownership, which are treated as a single employer for various benefit plan purposes)
  • Employee and participant communications describing the transaction and explaining the impact on employees’ benefits
  • Timely notifying insurers and third parties to terminate insurance policies and administrative service agreements for plans terminated during the transaction.  

Because M&A negotiations are confidential, and on someone else’s schedule, employee benefit representatives may be the last to learn of the potential transaction. Thus, decision makers often negotiate important purchase terms without input from employee benefits advisers, and they assume the negotiated benefit terms comply with applicable law.    

Inadequate transition planning and benefit plan due diligence can lead to post‑closing complications. To minimize last‑minute employee benefit “surprises,” buyers and sellers should consult with various employee benefits experts (attorneys, third‑party administrators, benefit brokers, agents, and advisers) when negotiating the purchase agreement terms and conducting due diligence on the seller’s benefit plans.

M&A transactions can be tricky, and there are many factors to consider. It is important to work with experienced professionals to assist throughout the M&A process. They can work with clients to help identify and minimize risks, as well as maximize the value of their transaction.

[1] Employee Retirement Income Security Act (ERISA); Patient Protection and Affordable Care Act (ACA); Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA); Health Insurance Portability and Accountability Act (HIPAA); the Americans with Disabilities Act (ADA and ADA Amendments Act); Family and Medical Leave Act (FMLA); and Genetic Information Nondiscrimination Act (GINA).

This content was written and shared by guest blogger Robert Kistler.

Bob KistlerAs an attorney at Barrett McNagny, Robert Kistler concentrates his practice in the area of employee benefits, ERISA compliance, and litigation. Working with employers, plan administrators, and service providers, he advises on plan design and administration, fiduciary responsibilities, plan compliance, and plan corrections. He also works with clients on other benefit laws including COBRA, HIPAA, and the ACA.

He has represented clients before the IRS and the U.S. Department of Labor regarding plan determinations, corrections, and audits. Bob has also advised clients on design and administration of employee stock ownership plans (ESOPs), the formation of tax‑exempt organizations and voluntary employee beneficiary association (VEBA) trusts.

Connect with Robert via Barret McNagny's website or LinkedIn.

Disclaimer: This information is for informational purposes only and should not be considered legal advice. In particular, the information in this article may not reflect the most current legal developments or your unique circumstances. As such, you should not act based on information in this article without first consulting legal counsel.

Topics: M&A
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