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Why benefit plans are a key component in mergers & acquisitions

September 5, 2014


Growing through acquisition is something that is on the agendas of many companies.

During this process, you’ve analyzed data, performed due diligence and double-checked the numbers countless times. However, you may have overlooked one crucial aspect: the benefit plans.

In an M&A world, all of the hard work you’ve dedicated to the target company needs to be applied to its benefit plan and how it relates to your existing plan. A dedicated focus on employee benefit plan administration, design and compliance will prevent the acquired plan from turning into a ticking time bomb.

During an asset purchase, acquisition or merger, the benefit plans serves as a key component in the likelihood of the transaction’s success – from a business perspective and, more importantly, from your employees’ perspective. Skilled professionals like those at Clark Schaefer Hackett have benefit plan expertise and can help ensure you meet the compliance requirements, have a clear understanding of future cash requirements and establish an effective transition plan. Working with the right professionals can help you provide the needed benefits to your employees, free of complications.

A close eye on benefit plans can prevent problems
Performing a careful analysis of your plan – and your target’s – will help you gain clarity into what complexities you may face in managing multiple plans in order to make clear decisions. Most importantly, a lack of focus can lead to compliance problems. With this in mind, thorough due diligence procedures need to be a focus so risk can be managed.

As an example, you may find the target company sponsors defined contribution, defined benefit and health and welfare plans. It is not uncommon for due diligence procedures to uncover plans with delinquent filings, incomplete filings, unexecuted plan documents/amendments or administrative processes that do not follow the plan document provisions. Additionally, you will want to heavily involve your human resources department so they can consider how to adjust existing internal controls to accurately track plans with differing eligibility requirements, eligible compensation definitions and employer contribution formulas. They can also help with benefit cost projections and how to handle document retention issues.  Paying attention to details in the beginning of the M&A process so a thoughtful transition plan is developed is likely to save you money in the long run.

Determine how you want to proceed
After due diligence procedures are completed, management can take these results and begin focusing on the desired benefit plan structure after the transaction. Careful consideration of the business environment, employee composition, plan costs and benefit design will be crucial factors in these discussions. Ultimately, you will need to ensure all plans retain tax qualification throughout the transition process.

If any noncompliance or errors are discovered during the due diligence process, you may determine that the target plan should not be included in the asset purchase. If keeping the plans separate is not a viable option, you may need to estimate and cover additional expenses to bring the acquired plan back into compliance. Above all else, ensure benefit experts like plan auditors and ERISA attorneys are included in this process. This close analysis will help you shed light on problems and provide guidance on how to proceed with multiple plans.

On a broad scale, you have several options with the acquired target plan and how it interacts with an existing plan, including:

  1. Merging the plans
  2. Terminating the target’s plan
  3. Maintaining the target’s plan

Merging the acquired plan into the existing plan generally means all employees will receive the same benefits and you are now responsible for the history of the target’s plan. Merging plans could mean an increase or decrease in benefit levels for the acquired employee group, as well as cost savings for administering one versus two plans. Management will not only need to forecast the costs to estimate the true financial impact of this long-term decision, but also take into account other areas affecting the success of plan mergers – understanding each business unit, employee morale/retention, union contract requirements, etc. In situations where there are no known compliance issues and benefits are similar, the decision to merge plans can be clear. In other situations, there may be valid reasons to maintain separate plans with differing benefit levels for different employee groups.

Plan termination is a possible solution in a situation where a target plan has compliance issues or management desires to manage costs by stopping benefit accruals. In order to terminate the target’s plan, you will need to know the provisions in the target plan’s document as well as all regulatory requirements. Working with experienced plan specialists will help you establish a step-by-step timeline and cost budget to ensure all required steps and filings are properly completed. Terminating a defined benefit plan is much more complex than other types of plans and plan actuaries will be needed to help management develop a termination strategy that will ensure the plan’s funding status and cash flows are adequate to pay out required plan benefits.

In option No. 3, the target’s plan would continue to operate separately with the same benefits as provided pre-transaction. After the transaction, you would be involved in plan oversight, selection of service providers and ensuring the plan is in compliance. Keep in mind that in order to meet nondiscrimination requirements, separate plans may require controlled group combined testing. So, discuss testing needs with the administrators of both the target plan and your existing plan.

Audits play a key role in the process
Don’t underestimate the value of an effective plan audit. Generally speaking, an audit is required for most plans that have more than 100 eligible participants. However, an audit can be a tool utilized during the M&A process as part of the due diligence. Plan audits don’t simply audit investments – a quality plan audit also tests eligibility, participant loan compliance, investment allocations, calculations of employee and employer contributions, distributions and compliance filings. Performing an audit can help identify these problems early and help you implement corrective measures now. This is far less burdensome than having the Department of Labor (DOL) or IRS find in these issues in a future audit, which can then lead to costly corrections and penalties. In fact, choosing a qualified auditor is part of your fiduciary duty.

To make audits as efficient and meaningful as possible, you need to prepare for your auditors. For starters, ensure you understand the plan provisions and have all executed documents, amendments, minutes and service agreements on hand. Provide the auditors with all results and supporting documentation showing any corrective measures taken during the year. Additionally, keep you auditor informed about corporate and benefit plan structure modifications. In an M&A situation, it may be necessary to switch audit firms of one or more plans. Working with the right auditor – and switching in a timely fashion – can make the process simpler, and help the auditor be better equipped to guide you through the requirements related to sponsoring multiple plans.

When picking an auditor, make sure you choose a firm that has a strong knowledge of benefit plans. Clark Schaefer Hackett is that company. Our experts maintain close relationships at the national level with the DOL, Employee Benefits Security Administration (EBSA) and other important agencies. Our plan auditors are experienced, skilled individuals who understand the industry and are adept at problem solving. We also go the extra step above compliance by bringing you solutions and keeping you informed of the ever-changing regulatory environment. Our partnership and consulting services are just as valuable as our auditing abilities.

With our wide range of options, including consulting, auditing, design, administration and more, we’ll be able to help you no matter your situation. Above all else, we know about benefit plans.

© 2014

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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