Benefit Issues Raised in Mergers and Acquisitions Larry Grudzien Attorney at Law
ABOUT LARRY About Larry Lawrence (Larry) Grudzien, JD, LLM is an attorney practicing exclusively in the field of employee benefits. He has experience in dealing with qualified plans, health and welfare, fringe benefits and executive compensation areas. He has more than 35 years’ experience in employee benefit law. Mr. Grudzien was also an adjunct faculty member of John Marshall Law School’s LL.M. program in Employee Benefits and at the Valparaiso University’s School of Law. Mr. Grudzien has a B.A. degree in history and political science from Indiana University, J.D. degree from Valparaiso University School of Law and LL.M. degree in tax from Boston University School of Law. He is a member of Indiana and Illinois Bars.
AGENDA 1. Types of Transactions 2. Steps to consider in getting ready 3. Effects on benefit programs • Health plans • Other health and welfare plans • Other benefit issues • Retirement plans • Controlled group issues • Executive plans • Management issues 4. Due Diligence 5. Summary of actions 6. Questions
Types of Transactions • Stock Purchase • Asset Purchase • Mergers • Acquisitions • Spin-Offs
Benefits Affected • Qualified retirement plans • Cafeteria Plans • Health & Welfare Plans • Other benefits • Executive plans • COBRA
Stock Purchase • Buyer is buying the entire stock of the Target • Target will either disappear entirely or be a subsidiary of Buyer • Target employees become Buyer employees at closing • Buyer assumes all obligations & liabilities of Target
Asset Purchase • Buyer is purchasing certain assets of Target - Can be all assets of Target, leaving a shell of a corporation behind - Can be a particular location or division of Target • Target employees remain employees of Target, unless hired by Buyer • Target retains all responsibility for benefit plans (with a few exceptions)
Merger or Acquisition Following the close, what happens to Target? • Absorbed within Buyer (merger) - Treated like any other buyer division - Same buyer benefit structure, generally • Stand alone business (acquisition) - With separate benefit structure, or - With Buyer’s benefit structure
Spin-off • No other entity involved • Company decides to spin off a division - Often “sold to management of division” - Being set up for possible future sale • Asset Sale • Benefit Plans - Continue in parent company plans - Establish new plans
Common Situation • Negotiations have been taking place for weeks • No one has informed HR regarding the deal until it is almost done • HR has a few days or a week to prepare for the change • Be careful, deal can collapse at the last minute
First Step in Process • Inventory plans • Collect plan documents • Collect plan data • Decide on fate of future benefits • Some things must happened before closing • Some things cannot happen before closing
Employee Communications • Be careful when to communicate • Deals fall through or change • Keep rumors to a minimum • Prepare a variety of communications based on possible alternatives • Must work with senior management in preparing any communications
Specific Plan Issues • Particular issues depends on the type of plan involved • Pay close attention to Plan specifics • Carefully review all administrative contracts and insurance contracts • Review possible state and federal notice and disclosure requirements before and after the transaction
Health Plans Self-Insured • Stock sale – buyer assumes liability for health benefits unless terminated before transaction - Is plan documentation in order - All reporting, notices and disclosures completed? - How does level of benefits compare with Buyer • Asset sale – liability stays with the Seller - Will Seller terminate all plans? - Were all required notices given to employees?
Health Plans Self-Insured Key Questions regarding Target Plan if assuming: • Are there sufficient funds to covered incurred but unreported claims? • Are assets held in VEBA? • Is the stop loss coverage adequate? • Any future large claims made but not paid? • COBRA Administration? Any offers outstanding?
Health Plans Self-Insured Merge with Buyer Self-insured Plan • Any issues with stop loss coverage • Administration • Reporting • Possible Claims Administration • Any nondiscrimination testing issues in the past Any retiree medical offered?
Health Plans Fully Insured Stock sale – buyer assumes insurance contracts • Any issues with assuming contracts? • How will transaction will affect renewal? • Level of benefits – Compare to Buyer Asset sale: Seller retains (or ends) contract • How will sale affect assumption • Seller notice requirement to terminate contract
Health Plans Fully Insured Key questions for Buyer: • Does Buyer want to cancel insurance contracts and merge participants into Buyers plan? Or… • Does Buyer want to assume contract? Need insurer’s Approval • Any issues with administration or reporting? • Check contract for any notice requirements Retiree Medical Offered?
Health Plans - ACA • Are the Target plans grandfathered? • Does the size of the Target make a change in the ACA rules that apply to Buyer • If a spin off, does this change the size of the remaining company • Has Target decided to “pay” rather “play” • Has Target completed all disclosures, notice and reporting required under ACA?
Employee Issues If it is decided to change health plans as a result of transaction, then: • Will the level of benefits change sufficiently for employees? • Will deductibles, copays and co-insurance carry-over or start over? • Will the networks changes? Are Employees or dependents in mid-treatment? • Change in RX formulary • Will Buyer waive all waiting periods if Asset Sale?
COBRA Coverage Liability depends whether it’s a stock or asset sale • Stock sale – Buyer assumes liability for those on COBRA or that are terminated • Asset sale – Buyer can contact out of COBRA only if Seller continues health coverage • If Seller terminates all health coverage, Buyer is responsible for COBRA to terminated employers of Target
Health FSA Stock sale – Buyer assumes plan, regardless of whether currently over or underfunded: • Continue, terminate or merge in the future • Effect of transaction on nondiscrimination testing – test together or separate? • Check requirements for assuming TPA contracts • Amend documents and disclosures
Health FSA Asset sale – Buyer and Seller have three options: • Seller retains participants on Seller’s plan, Buyer transfers deferral to Seller’s plan under COBRA • Buyer assumes Seller’s plan • Participants transfers on to Buyers plan with transfer of assets/liabilities • No change in participant deferral rates • Will Buyer waive all waiting periods?
Other Health and Welfare Benefits Stock sale: • Will Buyer assumes plans at closing and decide when and if to terminate them? • Transfer insurance contracts, check contract terms for requirements • If any benefits are self-insured, effect of transaction on nondiscrimination testing • Check documentation, notice and disclosure compliance • COBRA offered for these benefits?
Other Health and Welfare Benefits Asset sale: • Buyer has no obligation to continue any benefit programs • Buyer may want to assume benefits for a limited period • Check requirements for assumption before closing • If Buyer does not assume benefits, will Buyer waive all waiting periods for benefits? • Check if COBRA needs to be offered
Other Issues That Affect Health & Welfare Benefits Family and Medical Leave Act (FMLA) • Will transaction change compliance with FMLA? • Any employees on FMLA leave? • Check past compliance with FMLA Workers compensation compliance • Any outstanding settlements • Were employees still on benefits, offered COBRA Medicare secondary payer rules • Will transaction change compliance? • All reporting and disclosure done: Dependent audits
Other Benefit Issues to Consider Vacation time • Accrual Rate • Consider past service in determining amount • Special considerations for the year of the transaction Sick time • Accrual Rate • Special considerations for the year of transaction Other employment issues
Retirement • 401(k) plans issues • Controlled group issues
401(k) plans Stock sale issues: • Check qualification status of the plan • Appropriateness of investments • Outstanding errors (EPCRS) • Quality of Plan administration • Plan fees • Passing nondiscrimination tests of combined plans • Reporting and disclosure compliance
Transition Period Nondiscrimination Testing Issues: • Can maintain separate plans, without testing together for a plan year of acquisition/merger and the following year • Must have separately passed tests before the transaction • Gives Buyer time to merge plans, may run them separately • After transition period, can maintain separately but must combine test for certain reasons
401(k) Plans Options Considerations • Maintain two plans • Will employees move between two divisions? • Merge plans • Protected benefits • Terminate one plan • Pan feature issues • Freeze one plan • Investment issues
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