Larry GrudzienAttorney at Law

Benefit Issues Raised in Mergers and

Acquisitions

ABOUT LARRY

About LarryLawrence (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.

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

AGENDA

• Stock Purchase

• Asset Purchase

• Mergers

• Acquisitions

• Spin-Offs

Types of Transactions

• Qualified retirement plans

• Cafeteria Plans

• Health & Welfare Plans

• Other benefits

• Executive plans

• COBRA

Benefits Affected

• 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

Stock 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)

Asset Purchase

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

Merger or Acquisition

• 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

Spin-off

• 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

Common Situation

• 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

First Step in Process

• 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

Employee Communications

• 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

Specific Plan Issues

• 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 Self-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 Fully Insured

• 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?

Health Plans - ACA

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?

Employee Issues

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

COBRA Coverage

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?

Health FSA

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 Health and 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 Issues That Affect Health & Welfare Benefits

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

Other Benefit Issues to Consider

• 401(k) plans issues

• Controlled group issues

Retirement

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

401(k) plans

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

Transition Period

Options

• Maintain two plans

• Merge plans

• Terminate one plan

• Freeze one plan

401(k) Plans

Considerations

• Will employees move between

two divisions?

• Protected benefits

• Pan feature issues

• Investment issues

• Cannot terminate plan after stock sale closing if:

- 401(k) plan exists

- A 401(k) is established 12 months following distribution of assets

- “Successor Plan”

• Not an issue if an asset sale

• Need to make decision about the plan prior to closing

401(k) Successor Plan Limitations

• Safe Harbor Plan

• Roth contributions

• Roth conversions

• Loans

• Self-directed

investments

401(k) Plan Features

• Stable Value Fund –

liquidate or transfer

• Real estate

• Limited Partnerships

• Insurance contracts

• Company Stock

• Don’t forget the

blackout period!

401(k) Plan Investments

• Existing controlled groups may no longer exist after transaction

• New controlled groups may have been created

• Impact:

- HCEs

- Key employees

- Plan structure

- Testing

- Reporting

- Multiple employer plan/ MEWA issues

Controlled Group Issues

• Nonqualified plans – documentation available?

• Promise in writing – Is funding available, life insurance?

• Any Company owned life insurance contracts?

• Any “split-dollar” insurance plans?

• Do plans have “change in control” provisions?

Executive Plans

Stock Sales

• Any buy sell agreements

• Employment contracts

• Any severance arrangements

• Special benefit arrangements with executives

Asset Sales

• Enter into employment contacts with selective management

• Any special benefits to assume?

Management Issues to Consider?

Stock Sales

• Any buy sell agreements

• Employment contracts

• Any severance arrangements

• Special benefit arrangements with executives

Asset Sales

• Enter into employment contacts with selective management

• Any special benefits to assume?

Due Diligence

Other Health & Welfare Plans

• Documentation

• 125 tests

• COBRA administration

• Reporting and disclosure

Short-Term Disability

• Payroll practice or insurance contract

• Clear Policy

Other issues to consider

• FMLA

• Medicare Secondary Payer

• Workers compensation

• Set strategic concept early

• Gather full and complete information on all employee plans

• Evaluate plans and identify issues, possible conflicts limiting factors

• Develop implementation process for the entire benefit

• Confirm understanding with senior management

• Negotiate with record-keepers, insurers and investment managers

• Manage employee communication

Summary

QUESTIONS?

Larry Grudzien, Attorney at Law

• Phone: 708-717-9638

• Email: larry@larrygrudzien.com

• Website: www.larrygrudzien.com

Contact Information