This document discusses considerations for employee benefits in mergers and acquisitions. It identifies key risks including funding status of defined benefit plans, compliance with plan rules, and potential liabilities. It also outlines diligence needed on retirement plans like plan documents, testing and funding information. Diligence is also needed for welfare plans, including health plans, to understand compliance, liabilities and commitments being made. Executive compensation arrangements also require review for severance, equity treatment and compliance with tax rules.

1. Employee Benefits Considerations
In Mergers And Acquisitions
Jeffrey A. Lieberman
November 14, 2013

2. Structure
Stock or Merger
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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
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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.
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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
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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:
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(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)
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5. Retirement Plans
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Failure to timely contribute amounts to plan. Exposure for lost
earnings; participant claims; excise taxes other DOL remedies
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Fiduciary obligations of sponsor/committee and administrators
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Current focus on plan investments (prudence; diversification;
presence of employer stock; investment policy statements; open
brokerage windows)
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Has administration been in accordance with written terms
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Prohibited transactions
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Employer stock in plans
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Reporting and disclosure. Timely and complete filing and disclosure of
5500s with completed audits (if necessary); SPDs; SARs; and PBGC
filing
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6. Retirement Plans
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408b(2) disclosures to fiduciaries
404(a)(5) participant fee disclosures
Committee actions and procedures
Contracts with vendors
Reportable Events (including the
transaction)
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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
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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
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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)
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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)
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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
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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
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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)
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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
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15. Welfare Benefits
• Vacation
• Sick/personal leave
• Payroll practices
• WARN (state WARN)
• COBRA (state COBRA)
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16. Multiemployer Plans
• Union negotiation issues
• Withdrawal liabilities
• Effect of transaction structure (Asset vs
Stock Sale)
• Litigation risks
• Controlled group risk
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17. Controlled Group liabilities
– In general 80% common control
– Multiemployer withdrawal liability,
termination, funding contributions,
COBRA
– Sun Capital ruling
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18. Executive Compensation
Employment Agreements
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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
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Individualized employment or deferred compensation agreements, or
plans that benefit a select group of highly compensated employees
(top hat). Rabbi Trust funding triggers
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19. Executive Compensation
Equity
• Options, restricted stock, SARs, other…
• Acceleration, assumption, vesting
• Restrictive covenants
Say on Pay/Say on Golden Parachutes (public)
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20. Executive Compensation
and lest we forget………
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21. Executive Compensation
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Section 409A
Compliance
Corrections
Constraints
Penalties/reporting
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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
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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
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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
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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
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26. Diligence
Welfare Plan Benefits
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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
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27. Diligence
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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
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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
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29. Question and Answer
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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.
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