Employee Benefits ConsiderationsIn Mergers And Acquisitions

Jeffrey A. LiebermanNovember 14, 2013

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.

Structure

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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

Retirement Plans

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• 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)

Retirement Plans

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• 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 PBGCfiling

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)

Retirement Plans

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• 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

Retirement Plans

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Medical PlansPlan 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

Welfare Benefits

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• 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)

Welfare Benefits

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• Self-funded medical plan runoff

• COBRA compliance and future obligations

• Reporting and disclosure obligations under ERISA

• Disclosure obligations under health laws (HIPAA)

Welfare Benefits

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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

Welfare Benefits

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• 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

Welfare Benefits

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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)

Welfare Benefits

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Affordable Care Act • Compliance – Employer Mandate set to begin in

2015

• Planning

• Workforce (part time, seasonal, pay levels)

• Penalties, coverage, litigation risks

Welfare Benefits

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• Vacation

• Sick/personal leave

• Payroll practices

• WARN (state WARN)

• COBRA (state COBRA)

Welfare Benefits

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• Union negotiation issues

• Withdrawal liabilities

• Effect of transaction structure (Asset vsStock Sale)

• Litigation risks

• Controlled group risk

Multiemployer Plans

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– In general 80% common control

– Multiemployer withdrawal liability, termination, funding contributions, COBRA

– Sun Capital ruling

Controlled Group liabilities

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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

Executive Compensation

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Equity• Options, restricted stock, SARs, other…

• Acceleration, assumption, vesting

• Restrictive covenants

Say on Pay/Say on Golden Parachutes (public)

Executive Compensation

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and lest we forget………

Executive Compensation

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• Section 409A

• Compliance

• Corrections

• Constraints

• Penalties/reporting

Executive Compensation

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• 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

Some Post-Deal Considerations

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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

Diligence

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• 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

Diligence

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Nonqualified Deferred Compensation Plans (voluntary deferred compensation plans, supplemental executive retirement plans-SERPs, 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

Diligence

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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

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

Diligence

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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

Diligence

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Question and Answer

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New York OfficePhone: 212/351-3783jlieberman@ebglaw.com250 Park AvenueNew 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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