M&A and Employee Benefits: Pre-Transaction Considerations
Corporate mergers or acquisitions are complex, labor-intensive processes with high-stakes outcomes. To successfully bring together two companies, there are a tremendous number of issues that need to be analyzed and thought through both before and after the transaction closes.
In many cases, employee benefits get overlooked while the management teams of the buyer and seller—as well as their investment bankers, attorneys and other advisors—prepare for the transaction. This is a mistake that can have major consequences for both parties. In some cases, overlooked compliance or accounting issues related to employee benefits could hurt the value of the transaction or derail the deal altogether.
In this two-part series, we will first examine some of the benefits-related issues that buyers and sellers should consider before a transaction closes. In the second article, we will review key things benefits managers should consider after the transaction closes to ensure a smooth transition for employees.
Preparing for Due Diligence
To facilitate the due diligence phase of the transaction process, the seller should be able to provide all the necessary documentation about its employee benefits. This includes retirement plan, health and insurance documents, Form 5500s, procedures and policies, remittance schedules, contracts with service providers, and more. The seller should also provide information about Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) audits or other examinations that may have happened in the past three years.
In reviewing these documents, the potential buyers are trying to determine whether there are any problems that could negatively affect them and, in turn, the amount they are willing to pay for the company. If there are any outstanding errors, before the deal is finalized, the seller may have to follow the IRS’s correction program (the Employee Plans Compliance Resolution System) or the DOL’s correction program (the Voluntary Fiduciary Compliance Program).
Options for Handling Retirement Plans
The due diligence period is also when the buyer should begin thinking about how it will handle the 401(k) and/or pension plans of the seller. The options for this depend largely on whether the transaction is structured as a stock sale or an asset sale.
In a stock sale, the buyer acquires the selling company’s stock and takes ownership of the seller’s legal entity. As a result, the buyer becomes the new sponsor of the retirement plan when the transaction becomes final, assuming all of the past and future obligations associated with that plan. This is why it’s critical to make sure the plan is compliant with all regulations including all reporting, disclosure and testing requirements.
In a stock sale, buyers have three options for how to handle the seller’s retirement plan: terminate it (or require the seller to terminate it immediately pre-close), continue operating it as a separate plan (assuming it and the seller’s other retirement plans can pass testing post-closing with separate plans, after the special M&A transition rule under Section 410(b)(6)(C) has expired) or merge it with their own plan. There are pros and cons to each approach.
With an asset sale, the seller maintains ownership of its legal entity and the buyer acquires only the assets and liabilities that are specified in the transaction agreement. As a result, the buyer doesn’t necessarily need to take ownership of the seller’s benefits plans. If the seller retains ownership of the retirement plan, they may choose to keep the plan open or terminate it. If it’s kept open, employees who don’t work at the selling company after the merger can request a distribution based on their termination of employment with the seller.
BDO Insight: Every Company Should Consider Itself an M&A Candidate
Even if your company doesn’t consider itself to be an acquisition target in the near future, you should approach the oversight and recordkeeping of your employee benefits as if you were getting ready for a due diligence process. It’s a simple, good practice to maintain updated records, processes and documents so that when and if an M&A opportunity arises, your organization is prepared. If your company is a potential buyer, the importance of conducting thorough due diligence of a seller’s benefits well before the deal becomes final can’t be stressed enough.
Regardless of whether your company is considering a merger or acquisition, it might be a good time to see whether you are “M&A ready.” Your BDO representative can explain the process of evaluating your benefits plans and related recordkeeping. Mapping a plan today can improve the chances of a smooth transition down the road.
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