From global, publicly-owned corporations to privately-held, mid-size owner-operated businesses, today’s economic landscape encourages merger and acquisition (M&A) activities more than ever.

The M&A trend continues!!

Just two years ago, the Global Confidence Barometer survey reported that 75% of employers in the United States were pursuing an M&A deal within the year. This movement may be fueled, in part, by the surge in Baby Boomers preparing to leave the workforce in a great ‘migration’ that is anticipated to affect business ownership and continuity. While some CEOs and owners have seamless succession plans in place, others do not – and their organizations may rely on outside deals to ensure their sustainability and continuing legacy.

Of course there are many issues to address when a company heads down the M&A path, from identifying the right strategic partner, to conducting due diligence and pre-planning, to considering the stakeholders’ interests, to anticipating how to integrate two cultures and two missions into one entity, to selecting a name that is acceptable to all parties, and much more.

One area that cannot be overlooked is the integration of the employee benefit plans

In “Putting the Service-Profit Chain to Work,” one of Harvard Business Review’s most well-known case studies, the authors establish the direct correlation between satisfied employees – and the way they treat customers and each other – and the company’s profitability.

But employees dealing with the uncertainty surrounding a sale of the company are often deeply concerned about retaining their benefits (to ensure their family’s well-being and safety), as well as retaining their jobs and maintaining their financial stability. Therefore it is harder for them to feel loyal and satisfied and to drive profitability for the company.

Research proves reports of this fear to be true. According to David Kirchner, a principal with the Benefits Consulting Group at Boston-based law firm Ropes & Gray, health insurance and retirement plans are the major concerns for employees, because the potential financial liabilities of losing them are the greatest.

If it is acknowledged that happy, loyal employees are at the core of a company’s top and bottom line success, then it makes sense that management will want to communicate openly, honestly, and frequently with employees throughout the M&A timeline, most especially alerting them regarding the potential impact on issues of key importance to them personally, such as their perks and their benefit plan.

The deal structure has a significant impact on the integration of the benefit plans

In an asset purchase, the employee benefit plan most likely will remain with the seller, but in a stock purchase, the employee benefit plan is inherited by the new owner (the buyer).As such, the buyer in a stock purchase will be responsible for the maintenance of the existing employee benefit plan and ultimately its integration into the existing company’s Plan if there is one. In an asset purchase, employees are terminated by the seller and, if hired by the buyer, may decide to join the new company’s Plan or make other choices.

Dangers lurk in the deal process regarding the employee benefit plan integration

Why does it matter? Because even a small qualified Plan can have millions of dollars in assets, the purchaser must beware of all the possible scenarios that can occur. Since the new buyer will be held accountable for any problems and resulting penalties, or if there are any corrective contributions that need to be addressed, they could face major financial obstacles. It is wise to have all the facts and to be prepared for challenges that may arise.

Due diligence is the way to start!

The buyer needs as much data as possible in order to understand if the seller’s Plan is operating in compliance with the law as well as to understand what action needs to take place going forward, either to integrate the seller’s Plan or to avoid integrating the seller’s Plan – whichever represents the best business and legal decisions.

As a result, the acquiring company should begin by requesting a current Plan valuation and disclosure of the retirement benefits, as performance may have changed over the time since its inception.

This portion of the due diligence process is comprised of a detailed laundry list of questions from the buyer targeting the company’s 401(k) plans and defined benefit plans as well as any health plans and nonqualified deferred compensation plans.

To accomplish this, frequent meetings and open communication between the employee benefit consultant, the plan actuary and administrator, record keeper, the HR Director and the company’s CPA or other trusted advisors, should be scheduled.

During this investigative phase, the requested laundry list mentioned above provides the buyer with:

  • Any missing or unsigned Plan documents Disclosure of operational failures
  • Alerts regarding any failed annual discrimination testing
  • List of employees excluded from the Plan (because they are considered part time or temporary)
  • Information regarding problems associated with related employers participating in a Plan
  • Any issues involving leased employees
  • Confirming that there is no existing “multi-employer’” Plan in effect
  • Announcement of the existence of any previous improper plan mergers

The most common challenges faced by many buyers as they continue to work through theemployee benefit plan discovery process is lost or missing documents or forms, failure to file or other legal compliance missteps, and qualification failures.

Keep in mind that the value of the Plan and any liabilities that might be associated with it, can have a profound influence on the sale price, purchase agreement and terms, so this step must take place as early as possible during the negotiation phase of the deal. In fact, if the problems related to the employee benefit plan administration prove to be numerous – and onerous – the deal may fall through!

After the purchase is complete – now what?

Once the deal has closed and the buyer is the legal owner of the acquired business, the buyer’s Plan usually absorbs the seller’s Plan so that within one year from the end of the transaction there is only one surviving Employee Benefit Plan.

However, there are several steps that must be accomplished during that first year to legally complete the merger of the Plans that goes beyond simply transferring the funds from one Plan to the other Plan.

It is strongly advised that every business owner works closely with their TPAs and others involved in decision making to ensure that every “T” is crossed and every “I” is dotted to keep out of legal and financial difficulties!

If you have any questions, feel free to email Liz Harper at