When a company is bought, sold, merged, or reorganized, unexpected employee benefits issues may surface that can significantly affect the structure of the deal, liabilities, and future benefit plan design for the surviving entity and its employees.
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Those buying, selling, or merging businesses should consider the following situations in the early stages of exploring potential transactions.
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 liabilities that could arise. For example, the multiemployer plan may pursue the seller (and a controlled group or successor entity) for delinquent on contributions to the plans. In other circumstances, the closure of the business may trigger withdrawal liability owed to an underfunded pension fund for a business’s 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.
2. Could the transaction inadvertently create a multiple employer plan or multiple employer welfare arrangement?
Distinct from “multiemployer” plans, 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.
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 exactly identical between the 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.
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 Internal Revenue Code section 409A.
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 a merger or acquisition transaction should determine whether Section 280G applies to the transaction and whether the payments exceed the 280G golden parachute threshold. If they do, there may be methods to remedy the issue and avoid negative tax consequences.
6. Has the seller 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.
7. Will the transaction involve the termination or merger of a retirement plan?
Retirement plans are often merged or terminated as a result of an M&A transaction. The plan merger or termination process can be very involved, often requiring coordination with many plan professionals like recordkeepers, actuaries, and consultants over a long period of time.
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, participants of the ESOP have the right to direct the ESOP trustee to vote the shares of the employer stock allocated to his or her account. Additionally, a number of tax-qualification and ERISA fiduciary provisions are triggered by the sale of an ESOP company. Whether you are navigating a merger, acquisition, or restructuring, the complexities of employee benefits law demand specific legal expertise and foresight.
8. Have the parties resolved how to allocate COBRA responsibilities or the transaction involves a self-insured health plan?
An issue may arise with respect to the obligation to offer COBRA continuing coverage. 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.
9. How will health insurance plans and obligations be addressed?
Terminating or transferring health and welfare benefits are typically comparatively 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 significantly alter plan funding even with a stop-loss policy as backstop.
In summary, having an experienced employee benefits attorney involved early in an M&A transaction ensures that potential risks are identified and mitigated effectively, safeguarding the interests of both selling and buying parties alike. Whether it be Affordable Care Act compliance, ERISA fiduciary duties, multiemployer pension plan withdrawal liability, or the tax complexities of Sections 280G and 409A, an ERISA/Employee Benefits attorney can provide comprehensive counsel tailored to your specific needs.
Authors: Jenny Zhang and Ryan Curtis are attorneys with Fennemore Craig, P.C.’s ERISA and Employee Benefits Practice Group. They assist employee benefit plans, trustees and administrators in complying with important federal laws, including ERISA, the Internal Revenue Code, and the Affordable Care Act. They assist plans with complex plan corrections and represent plan sponsors before regulating governmental entities including defending plan sponsors in IRS audits and Department of Labor investigations.
