EMPLOYEE BENEFITS IN MERGERS & ACQUISITIONS PRESENTED BY: Bret A. McKitrick, JD Vice President HR Consultant Associated Financial Group Employee Benefits. Insurance. HR Solutions. LEARNING OBJECTIVES By the end of this webinar you will be able to: Identify the most common health and welfare employee benefit issues that arise during a merger and acquisition Educate senior management on benefits issues in a merger and acquisition Work with your benefits consultants to plan a smooth and orderly benefits transition 1 1
AGENDA TERMINOLOGY ROLE OF HR/BENEFITS MANAGER SPECIAL ISSUES OTHER WELFARE BENEFITS TERMINOLOGY Merger The joining of two or more different organizations under one common owner and management structure. Acquisition The process of one corporate entity acquiring control of another corporate entity by purchase, stock swap or some other method. 3 2
TERMINOLOGY Buyer The entity receiving the stock or assets being acquired in the transaction. Transaction may involve multiple buyers 4 TERMINOLOGY Seller The entity furnishing the shares or assets being acquired in the transaction. In some cases there may be more than one seller, e.g. two or more existing entities are merged into a new corporate entity Seller may or may not continue to exist after the sale 5 3
TERMINOLOGY Stock Sale Buyer purchases the stock (or its equivalent) of the seller entity. Seller entity continues to exist but under the ownership of the buyer Buyer acquires of all sellers assets and liabilities. Seller s employees experience no break in employment 6 TERMINOLOGY Asset Sale Buyer purchases some or all of the assets of the seller. Real estate Equipment and supplies Inventory Bank accounts and other financial assets Accounts receivable and other contracts Customer lists, patents, trademarks, copyrights, and other intangible property 7 4
TERMINOLOGY Asset Sale (cont.) Buyer can choose which assets and liabilities to purchase Buyer does not acquire ownership interest in seller entity Seller may continue to operate with remaining assets, be dissolved, or exist as a shell Seller s employees experience a break in employment and are new hires of buyer 8 AGENDA TERMINOLOGY ROLE OF HR/BENEFITS MANAGER SPECIAL ISSUES OTHER WELFARE BENEFITS 5
BENEFITS IN M&A How benefits are handled can have significant impact on success of M&A. Retention of key employees Address financial security Culture Hidden liability issues Cost issues 10 ANATOMY OF AN M&A Identification of Target Letter of Intent Due Diligence Negotiation & Valuation Final Agreement Announcement Integration 11 6
ROLE OF HR/BENEFITS MANAGER Educate senior managers on benefits issues Get involved early Notify vendors and advisors as soon as possible Understand goals of the M&A 12 ROLE OF HR/BENEFITS MANAGER Gather information Benefit information gathered during due diligence List of buyer and seller s existing benefits Plan documents Handbooks and policies Benefit communications Employee surveys & other cultural indicators Legal notices 5500s and nondiscrimination test results (where applicable) Contribution rates Participation rates Benchmarking data 13 7
ROLE OF HR/BENEFITS MANAGER Identify compliance issues Missing plan documents Inadequate legal notices Mandatory coverage not provided 14 ROLE OF HR/BENEFITS MANAGER Analyze overlaps and differences Benefits that exist at both companies Benefits that exist at one company but not the other Coverage differences Cost differences Network differences 15 8
ROLE OF HR/BENEFITS MANAGER Formulate a plan Short-term plans (post-announcement) vs. longterm (integration) Involve benefits staff and employees of acquired company, where feasible Consider all options Do not assume buyers practices and benefits are automatically the best or most appropriate Choose benefits that best meet the needs of the post-acquisition organization 16 ROLE OF HR/BENEFITS MANAGER Prepare a communication plan Over communicate Lack of information leads to rumors and paranoia If you can t answer a question or discuss a subject right away, be honest and explain why you are unable to provide an answer and when you will be able to answer Short-term plans (post-announcement) vs. long-term (integration) 17 9
ROLE OF HR/BENEFITS MANAGER Prepare a communication plan (cont.) What is staying the same? What is changing? Emphasize positive changes but don t ignore negatives. Explain why negative change is necessary or describe offsetting positive change 18 ROLE OF HR/BENEFITS MANAGER Prepare a communication plan (cont.) Build in opportunities to ask questions and solicit feedback Group presentations Q&A sessions One-on-one counseling sessions Hotline or dedicated HR rep 19 10
AGENDA TERMINOLOGY ROLE OF HR/BENEFITS MANAGER SPECIAL ISSUES OTHER WELFARE BENEFITS How many plans to maintain? Maintain both buyer s and seller s plans Maintain seller s plan for some time period, e.g. end of plan year, then move employees into buyer s plans Immediately cancel seller s plans and move employees into buyer s plans. 21 11
How many plans to maintain? (cont.) Disruption to employees Costs and administrative inconvenience of multiple plans Differences in network access Coverage differences Impact on premiums and underwriting Insurance company policies Compliance issues 22 Eligibility issues & waiting periods If maintaining seller s plan: Amend eligibility provisions in buyer s plan to ensure employees are not eligible Is acquisition an enrollment event which allows seller s employees to add or drop previous coverage? May depend on plan language and nature of transaction. 23 12
Eligibility issues & waiting periods (cont.) If discontinuing seller s plan: Seller s employees will generally be new hires eligible to enroll on buyer s plan Will seller s employees be subject to normal waiting period? May require plan amendment and consent of insurance company to waive waiting period. 24 Eligibility issues & waiting periods (cont.) Affordable Care Act Size of employer large or small for HCR compliance No Coverage penalty for large employers Look-back/Stability Model Types of employees (variable, non-variable, seasonal, etc.) When to offer coverage 25 13
Premium contributions Plan differences may result in higher premiums for seller s employees Employer contributions are different Different coverage tiers Elimination of age-banding Different plan designs 26 Premium contributions (cont.) May be possible to maintain different premium structures for seller s employees But do you want to? Compliance issues Compensation adjustments to make up for premium differentials Educate employees on reasons for cost differences 27 14
Premium contributions (cont.) Affordable Care Act Affordability penalty for large employers Premium tax subsidy qualification issues 28 Deductibles What happens to deductible expenses previously incurred on seller s plan when moving on to buyer s plan? Problem may be particularly acute if seller had a high-deductible health plan and transaction occurs mid-plan year. 29 15
Deductibles (cont.) Maintain seller s plan until end of deductible period Provide a deductible credit on buyer s plan for expenses incurred on seller s plan, if possible Offer an HRA or compensation adjustment to help offset the additional costs 30 Deductibles (cont.) Affordable Care Act Out-of-pocket maximum limitations Plan design issues 31 16
COBRA issues Special COBRA rules apply to M&As Outcome is often not intuitive and consequences unanticipated Buyer & seller can negotiate different COBRA liability in sales agreement But if responsible party fails to perform, other party liable in accordance with the COBRA M&A rules 32 COBRA participants on seller s plan prior to acquisition Three groups of employees Employees losing their jobs due to the acquisition Employees continuing employment after the acquisition 33 17
Stock sale Group #1 (Individuals already on COBRA) Seller maintains any group health plan after the sale Seller responsible for maintaining COBRA coverage Seller does not maintain a group health plan after the sale Buyer responsible for maintaining COBRA coverage 34 Stock sale (cont.) Group #2 (Terminated employees) Seller maintains any group health plan after the sale Seller responsible for offering COBRA coverage Seller does not maintain a group health plan after the sale Buyer responsible for offering COBRA coverage Group #3 (Continuing employees) Employees have not experienced a COBRA qualifying event 35 18
Asset sale Successor employer Buyer continues the business operations associated with the assets purchased without interruption or substantial change 36 Asset sale (cont.) Group #1 (Individuals already on COBRA) Seller maintains any group health plan after the sale Seller responsible for maintaining COBRA coverage Seller does not maintain a group health plan after the sale, buyer is a successor employer Buyer responsible for maintaining COBRA coverage Seller does not maintain a group health plan after the sale, buyer is not a successor employer COBRA coverage ends 37 19
Asset sale (cont.) Group #2 (Terminated employees) Seller maintains any group health plan after the sale Seller responsible for offering COBRA coverage Seller does not maintain a group health plan after the sale, buyer is a successor employer Buyer responsible for offering COBRA coverage Seller does not maintain a group health plan after the sale, buyer is not a successor employer No COBRA coverage available 38 Asset sale (cont.) Group #3 (Continuing employees) Seller maintains any group health plan after the sale Seller responsible for offering COBRA coverage Seller does not maintain any group health plan after the sale, buyer is a successor employer Employees have not experienced a COBRA qualifying event (even if buyer does not offer coverage) Seller does not maintain any group health plan after the sale, buyer is not a successor employer No COBRA coverage available 39 20
COBRA liability can spring onto buyer s plan E.g. Asset sale, buyer is a successor employer. Seller maintains group health plan for 60 days to wind up affairs after which plan is cancelled. Seller is responsible for COBRA for Groups #1, #2, and #3 until plan is cancelled. At that point, buyer is responsible for COBRA for Groups #1, #2 for remainder of COBRA period and Group #3 employees lose all COBRA coverage. 40 AGENDA TERMINOLOGY ROLE OF HR/BENEFITS MANAGER SPECIAL ISSUES OTHER WELFARE BENEFITS 21
DENTAL & VISION INSURANCE Many of the same issues that arise with health insurance apply to dental and vision as well but on a smaller scale Maintaining multiple plans Deductibles COBRA issues But don t underestimate impact on employee morale 42 HSAs Seller s employees retain existing HSA accounts and use funds to cover uninsured medical expenses. Cannot continue to contribute to HSA unless enrolled in HDHP. If buyer offers an HSA, funds can be rolled over to buyer s plan 43 22
HRAs HRA balances are not portable nor may they be cashed out. Balances will generally be forfeited unless buyer elects to maintain the plan Seller may have to offer COBRA if it continues to offer HRA to other employees after the sale. 44 HEALTH FSAs What happens to remaining balances in selling employee s health FSA? E.g. Employee elects $2,400 in seller s health FSA. After five pay periods, business is sold. Employee has contributed $500. No claims submitted balance = $500 $2,400 in claims submitted balance = ($1,900) 45 23
HEALTH FSAs Asset sale Default is remaining balances in seller s health FSA are forfeited, employees can make new election in buyer s health FSA IRS rules allow buyer and seller to agree that seller s employees may either: Continue to participate in seller s health FSA Transfer existing balances to buyer s health FSA May require amendment of plan documents and accounting of salary reductions and claims paid 46 HEALTH FSAs Stock sale If buyer maintains seller s health FSA after the sale, elections continue to end of the year without interruption If buyer cancels seller s health FSA, remaining balances are forfeited, employee s can make new election in buyer s health FSA 47 24
DCAP Usually less of an issue No uniform coverage rule Employees typically have sufficient day care expenses to deplete any balance in seller s DCAP Unclear if balance transfer rules available to health FSAs can be used for DCAP. 48 THANK YOU! ~ Connect ~ bret.mckitrick@associatedfinancialgroup.com linkedin.com/in/bretmckitrick AssociatedFinancialGroup.com 25