Buying or Selling A Business? Don’t Forget to Look Out For These Employee Benefits Issues!

Owners of companies are no strangers to the complexities of providing benefits to their employees including offering plans for retirement, group health, long-term incentives, performance and stock bonuses, or even reimbursing individuals for parking and mobile phone expenses. So when a company is bought, sold, merged, or reorganized, it may come as no surprise that employee benefits issues may surface that significantly affect the structure of the deal, liabilities, and future benefit plan design for the surviving entity and its employees.

In this blog post, we discuss some situations when you might consider engaging an Employee Benefits/ERISA attorney on your M&A transaction:

1. Multiemployer Plans:  Multiemployer plans are plans that are jointly sponsored between employers or employer organizations and labor unions. If a seller makes contributions to such a plan as a result of a collective bargaining agreement or participation agreement, both parties should be aware of the substantial liabilities could arise – if, for example, the seller is delinquent on contributions or if transaction triggers withdrawal liability from an underfunded multiemployer pension fund. An employee benefits attorney can analyze issues of successor or controlled group liability, whether the transaction triggers withdrawal liability, and explore ways to reduce the liability.

2. MEPs, MEWAs and other Controlled Group Issues:  Distinct from “multiemployer” plans, multiple employer plans (MEPs) and multiple employer welfare arrangements (MEWAs) are created when different unrelated employers (either through controlled group or collective bargaining) collectively 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. Some MEWAs are even prohibited under certain state’s law. 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.

Outside of the MEP and MEWA context, other controlled group issues include the aggregation of employees (to determine whether an employer is subject to the Affordable Care Act’s employer mandate), Form 5500 reporting, and non-discrimination testing.

3. 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) trigger accelerated vesting or payment of benefits. Section 409A of the Internal Revenue Code could impose significant tax consequences on the recipients of these awards unless an exception applies or the payment of deferred compensation otherwise complies with Section 409A. These arrangements should be reviewed carefully prior to close to avoid tax consequences on the company’s owners and key people. 

4. 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. Classification issues also affect non-discrimination testing for both health plans and retirement plans.

5. Retirement Plan Merger or Termination: Retirement plans are often merged or terminated as a result of a 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. An employee benefits attorney can advise on the process, and may assist in preparing and reviewing resolutions and amendments, IRS determination letter filings, participant notices, PBGC filings, and coordinate with other plan professionals to ensure the process goes smoothly and according to schedule. 

6. Self-Insured and Retiree Health Plans; COBRA: 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. 

An additional and separate 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. 

An employee benefits attorney can help you review and negotiate the transfer of employees from one company to the other, and insure the least amount of disruption possible.  

7. Golden Parachute Payments: Section 280G of the Internal Revenue Code imposes significant taxes on large payouts to certain executives, owners, and highly compensated individuals in the event of a change in control. An employee benefits attorney can analyze whether payments exceed the golden parachute threshold, and advise on methods to remedy the issue and avoid tax consequences.

8. ESOPs: Employee Stock Ownership Plans (“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 expertise and foresight. Having an experienced employee benefits attorney on board 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, our ERISA/Employee Benefits team at Fennemore is dedicated to providing comprehensive counsel tailored to your specific needs.