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Employee Benefits Considerations
In Mergers And Acquisitions
Jeffrey A. Lieberman
November 14, 2013
Structure
Stock or Merger
•
•
•
•
•
•

Identifying where the plan is sponsored (i.e., is target the sponsor or a participa...
Retirement Plans
Funding risk for defined benefit plans:
• Contributions are actuarially determined
• Does the plan have s...
Retirement Plans
• Changes in administration may not be formerly reflected
• Immediate plan amendments are often not requi...
Retirement Plans
•

Failure to timely contribute amounts to plan. Exposure for lost
earnings; participant claims; excise t...
Retirement Plans
•
•
•
•
•

408b(2) disclosures to fiduciaries
404(a)(5) participant fee disclosures
Committee actions and...
Retirement Plans
• Withdrawal liability. For multi-employer defined
benefit plans the termination of an employer’s
partici...
Welfare Benefits
Medical Plans
Plan documentation, participant communications, and
notice requirements are subject to a va...
Welfare Benefits
• Tax non-discrimination rules for self-funded
and eventually insured health plans and
flexible spending ...
Welfare Benefits
• Self-funded medical plan runoff
• COBRA compliance and future obligations
• Reporting and disclosure ob...
Welfare Benefits
Retiree health
• Disclosed on Seller’s financial statements
• “vested”?—i.e., has Seller reserved the rig...
Welfare Benefits
• Nondiscrimination rules for group term life
insurance plans, dependent care assistance
programs, certai...
Welfare Benefits
Severance plans
• Generally unfunded
• A severance plan will be considered a “welfare plan,” not a
“pensi...
Welfare Benefits
Affordable Care Act
• Compliance – Employer Mandate set to begin in
2015
• Planning
• Workforce (part tim...
Welfare Benefits
• Vacation
• Sick/personal leave
• Payroll practices
• WARN (state WARN)
• COBRA (state COBRA)

15
Multiemployer Plans
• Union negotiation issues
• Withdrawal liabilities
• Effect of transaction structure (Asset vs
Stock ...
Controlled Group liabilities
– In general 80% common control
– Multiemployer withdrawal liability,
termination, funding co...
Executive Compensation
Employment Agreements
•
•
•
•
•

Severance, termination (voluntary vs involuntary)
Change in contro...
Executive Compensation
Equity
• Options, restricted stock, SARs, other…
• Acceleration, assumption, vesting
• Restrictive ...
Executive Compensation

and lest we forget………

20
Executive Compensation
•
•
•
•
•

Section 409A
Compliance
Corrections
Constraints
Penalties/reporting

21
Some Post-Deal Considerations
Assumption/termination of Plans
Rollovers
Changes to programs post-transaction
Who is hired?...
Diligence
Retirement Plans
• Plan documents and amendments
• Trust documents
• Summary plan descriptions (“SPDs”) and othe...
Diligence
• Service agreements
• 3 most recent 5500s with all schedules, audits, and
actuarial reports
• Nondiscrimination...
Diligence
Nonqualified Deferred Compensation Plans (voluntary deferred
compensation plans, supplemental executive retireme...
Diligence
Welfare Plan Benefits
•

•
•
•
•

Health insurance plans (including HMOs, PPOs, wrap plans, retiree
plans, presc...
Diligence
•
•
•
•
•
•
•
•
•
•
•
•

Summary descriptions, employee handbooks, booklets and other
communications provided to...
Diligence
Payroll Practices
• Vacation leave, sick leave, paid time off, personal leave,
paid holidays, severance
• Copy o...
Question and Answer

29
New York Office
Phone: 212/351-3783
jlieberman@ebglaw.com
250 Park Avenue
New York, New York 10177-1211
JEFFREY A. LIEBERM...
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  1. 1. Employee Benefits Considerations In Mergers And Acquisitions Jeffrey A. Lieberman November 14, 2013
  2. 2. Structure Stock or Merger • • • • • • Identifying where the plan is sponsored (i.e., is target the sponsor or a participating affiliate) Target sponsor’s status as an “employer” for plan purposes generally does not change (merger may be different) Participating affiliate ordinarily ceases to participate Properly identify and consider existing and potential liabilities Often affects purchase price. Indemnities may not be sufficient especially if a public transaction Asset Sale • • • Buyer does not normally assume Seller’s plans or liabilities unless it is specifically provided for in transaction. (Possible exception for COBRA in certain situations, possibly “successor employer” concepts) Buyers seek to negotiate protection through indemnification provisions, escrow arrangements, or purchase-price setoffs. Because Buyer does not automatically assume Seller’s plans, there is usually a fair amount of leverage for Buyers. 2
  3. 3. Retirement Plans Funding risk for defined benefit plans: • Contributions are actuarially determined • Does the plan have sufficient funds to pay benefits • Accuracy of actuarial assumptions • Basis for specific indemnification (until statute of limitations) • Confirm actuarial presentation of status Defined contribution plans (401(k) and profit-sharing plans): • No funding requirement, liabilities are based on actual account balances only Operational and Documentation risk: • Complex rules require compliance with both the “form” of the document and the “operations” of the plan • Plan documents must continually be updated to reflect changes in law and regulations. • Interim plan amendments since the last determination letter may have been required, without formal IRS application 3
  4. 4. Retirement Plans • Changes in administration may not be formerly reflected • Immediate plan amendments are often not required, but nonetheless plans must be operated in accordance with law • Plan must comply with: – – – – – – (i) Minimum coverage and participation rules. (ii) Top heavy rules. (iii) Nondiscrimination testing (iv) annual contribution limits (v) fiduciary rules (vi) Complex distribution rules (hardship, loans, termination) 4
  5. 5. Retirement Plans • Failure to timely contribute amounts to plan. Exposure for lost earnings; participant claims; excise taxes other DOL remedies • Fiduciary obligations of sponsor/committee and administrators • Current focus on plan investments (prudence; diversification; presence of employer stock; investment policy statements; open brokerage windows) • Has administration been in accordance with written terms • Prohibited transactions • Employer stock in plans • Reporting and disclosure. Timely and complete filing and disclosure of 5500s with completed audits (if necessary); SPDs; SARs; and PBGC filing 5
  6. 6. Retirement Plans • • • • • 408b(2) disclosures to fiduciaries 404(a)(5) participant fee disclosures Committee actions and procedures Contracts with vendors Reportable Events (including the transaction) 6
  7. 7. Retirement Plans • Withdrawal liability. For multi-employer defined benefit plans the termination of an employer’s participation in the plan will trigger the calculation and assessment of withdrawal liability, which can be a significant expense • Not generally applicable in stock deal • Availability of ERISA Section 4204 to mitigate risk • Obtain ERISA Section 101[(k)] estimates 7
  8. 8. Welfare Benefits Medical Plans Plan documentation, participant communications, and notice requirements are subject to a variety of rules: (i) State insurance laws (if applicable) (ii) Mental Health Parity Act (iii) COBRA (iv) Health Insurance Portability and Accountability Act (including portability; special enrollment; privacy and security rules) – (v) Medicare Modernization Act – (vi) Affordable Care Act – – – – 8
  9. 9. Welfare Benefits • Tax non-discrimination rules for self-funded and eventually insured health plans and flexible spending account plans • HSA, HRA, FSA • Safe harbor group insurance (non-ERISA) 9
  10. 10. Welfare Benefits • Self-funded medical plan runoff • COBRA compliance and future obligations • Reporting and disclosure obligations under ERISA • Disclosure obligations under health laws (HIPAA) 10
  11. 11. Welfare Benefits Retiree health • Disclosed on Seller’s financial statements • “vested”?—i.e., has Seller reserved the right to change or terminate these benefits • Costs, accruals/projections Review : – (A) Plan documents and SPDs – (B) Any individualized agreements or promises of lifetime benefits – (C) All employee communications – (D) Past practices 11
  12. 12. Welfare Benefits • Nondiscrimination rules for group term life insurance plans, dependent care assistance programs, certain educational assistance programs, HSA, cafeteria plans • ERISA compliance, including plan administration, claims processes, and reporting and disclosure obligations • Plans that are subject to ERISA (such as employee assistance and severance plans) but may not have been historically treated accordingly 12
  13. 13. Welfare Benefits Severance plans • Generally unfunded • A severance plan will be considered a “welfare plan,” not a “pension plan,” as long as it does not exceed the employee’s annual compensation and payments are made over a period of less than 24 months after termination • Seller’s severance plans should be reviewed to determine if amounts are payable upon occurrence of the transaction (even if employee is rehired by Buyer in an asset transfer) • Look for severance triggers - if an employee continues to be employed but has a material reduction in duties or compensation post-transaction (may be more of an issue in executive arrangements) 13
  14. 14. Welfare Benefits Affordable Care Act • Compliance – Employer Mandate set to begin in 2015 • Planning • Workforce (part time, seasonal, pay levels) • Penalties, coverage, litigation risks 14
  15. 15. Welfare Benefits • Vacation • Sick/personal leave • Payroll practices • WARN (state WARN) • COBRA (state COBRA) 15
  16. 16. Multiemployer Plans • Union negotiation issues • Withdrawal liabilities • Effect of transaction structure (Asset vs Stock Sale) • Litigation risks • Controlled group risk 16
  17. 17. Controlled Group liabilities – In general 80% common control – Multiemployer withdrawal liability, termination, funding contributions, COBRA – Sun Capital ruling 17
  18. 18. Executive Compensation Employment Agreements • • • • • Severance, termination (voluntary vs involuntary) Change in control (vesting, termination protection, bonuses) Other costs (health care, perqs) Code Section 280G Gross-ups Nonqualified Deferred Compensation Plans • Individualized employment or deferred compensation agreements, or plans that benefit a select group of highly compensated employees (top hat). Rabbi Trust funding triggers 18
  19. 19. Executive Compensation Equity • Options, restricted stock, SARs, other… • Acceleration, assumption, vesting • Restrictive covenants Say on Pay/Say on Golden Parachutes (public) 19
  20. 20. Executive Compensation and lest we forget……… 20
  21. 21. Executive Compensation • • • • • Section 409A Compliance Corrections Constraints Penalties/reporting 21
  22. 22. Some Post-Deal Considerations Assumption/termination of Plans Rollovers Changes to programs post-transaction Who is hired? Terms and conditions? Severance - who pays? Employment agreements Vesting Termination protection Welfare plans What commitments are made, how much flexibility going forward • Integration into buyer plans? Standalone benefits? Testing • Severance/gross-ups, CIC protection • • • • • • • • • • 22
  23. 23. Diligence Retirement Plans • Plan documents and amendments • Trust documents • Summary plan descriptions (“SPDs”) and other communications • Insurance or group annuity contracts • Determination letter • Any investigations by regulators • Corrections made or contemplated 23
  24. 24. Diligence • Service agreements • 3 most recent 5500s with all schedules, audits, and actuarial reports • Nondiscrimination testing and top-heavy testing for 3 past years • Funding information, valuation reports, and calculation of withdrawal • Liability (if any) for defined benefit pension plans • Financial information (accruals, liabilities) • Committee minutes • Investment decision information 24
  25. 25. Diligence Nonqualified Deferred Compensation Plans (voluntary deferred compensation plans, supplemental executive retirement plansSERPs, excess benefit plans, executive agreements) • Plan documents, agreements • Any documentation about 409A analysis and compliance • Documents for rabbi trust or other funding vehicles • Descriptions of any informal arrangements • Trust statements (if any) for last 3 years • Service agreements • If a public company, documentation regarding identification of "specified employees" subject to 6-month delay on payments • Financial information with amount of accrued but unpaid benefits 25
  26. 26. Diligence Welfare Plan Benefits • • • • • Health insurance plans (including HMOs, PPOs, wrap plans, retiree plans, prescription drug plans, dental plans, vision plans, employee assistance plans, flexible spending accounts and cafeteria plans, dependent care assistance programs, life insurance plans, short and long-term disability plans, accidental death and dismemberment policies, business travel insurance plans, long-term care insurance plans, severance pay plans) Plan documents Trust agreements Insurance policies, including stop-loss insurance Service agreements 26
  27. 27. Diligence • • • • • • • • • • • • Summary descriptions, employee handbooks, booklets and other communications provided to employees Individualized agreements, contracts or summaries of oral agreements providing for welfare benefits 3 most recent 5500s, plus all schedules and audits Nondiscrimination testing for past 3 years, as applicable Sample COBRA notification forms Affordable Care Act compliance Sample HIPAA Certificates of Creditable Coverage and Medicare Part D Notices COBRA recipients and related COBRA information Self-insured costs HIPAA notices and compliance and security policies HIPAA business associate agreements Wellness programs 27
  28. 28. Diligence Payroll Practices • Vacation leave, sick leave, paid time off, personal leave, paid holidays, severance • Copy of employee manual or handbook and all • Summaries of individualized agreements for severance • Leave, sick days and vacation accruals 28
  29. 29. Question and Answer 29
  30. 30. New York Office Phone: 212/351-3783 jlieberman@ebglaw.com 250 Park Avenue New York, New York 10177-1211 JEFFREY A. LIEBERMAN is a Member of the Firm in the Employee Benefits practice, in the firm's New York office. He has more than 25 years of experience advising a broad range of clients on ERISA, employee benefits, and executive compensation matters. Prior to joining Epstein Becker Green, Mr. Lieberman was a partner in the ERISA and Executive Compensation practice of a major international law firm. 30
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