Employee Benefits Mistakes that Impact Mergers and Acquisitions
By Elizabeth Krystyn, Founding Partner
and Jacklyn Massrock, Benefits Director
Employee benefits issues may not be at the top of the agenda amid a merger or acquisition, but they are vital to a successful transition. Accurate, detailed analysis of employee benefits is required to evaluate, negotiate and close the deal. It can also provide valuable and objective insights into possible cultural challenges between employees’ current environment and their future state. The benefits that are offered and how they’re funded all provide a glimpse into how the current employer treats benefits as part of the employer/employee relationship.
In our due diligence analysis, BKS-Partners focuses on the need for sustainability and compliance to minimize unnecessary expenses and distractions. To assist our clients in this area, we focus our analysis on Cost, Culture, Compliance and Continuity. The following employee benefits mistakes represent the most common points to consider.
Employer and employee plan contributions are not negotiated in advance.
Plan contribution differences should be negotiated prior to a merger or acquisition to determine the true cost of incorporating another entity. If a stipend is going to be provided to bridge any differences, how long will it be in place? What needs to be communicated to the impacted employees and how? How important is it that they have visibility on the long term vision?
When the plan is fully-insured:
The Acquiring Company’s employee benefit carriers are not contacted to determine if the group will be re-rated with additional membership. Under most contracts, a change in enrollment of more than 20% subjects the group to re-rating. Employers should contact the appropriate carriers to understand how additional membership impacts plan rates and ultimately drives value.
When the plan is self-funded:
Responsibility for liability of claims in the run-out period is not negotiated accurately in advance. Both companies must determine who’s responsible for liability of claims for the time period immediately following the termination of the previous plan. Unexpected claims could arise for the buyer during the run-out period if liability was not previously negotiated and/or if the funds used for the run-out were not sufficient for the actual liability.
The buyer does not determine how the acquired group impacts their own self-funded plan. In an asset sale, the seller assumes liability. In a stock sale, the buyer assumes liability. Buyers must understand how additional liability, funding rates and stop loss contracts impact plan costs.
The buyer fails to notify the stop-loss carrier in advance. Many stop-loss insurance providers require the approval of acquired populations prior to extending coverage whether a stock sale or an asset sale.
Employees are misinformed about their benefits.
Communication is key during a merger or acquisition. Employees must be updated about any changes to their benefits program. Misinforming them or not communicating frequently can hurt company culture.
Insurance carriers are unaware of changes to membership information.
Insurance carriers must be aware of all employees being added to a plan and any changes made to the plan. If membership information is not communicated clearly, an employee’s health insurance could potentially be rejected at the point of claim.
Ancillary, voluntary and additional benefits are reduced or terminated.
Sometimes ancillary benefits and additional benefits like employer-sponsored plan contributions and paternity leave are cut during an acquisition to save money. This dramatic change can leave employees with the impression that they’re being personally discriminated against. In addition, with advance and proper negotiations, many insurance companies will waive pre-existing condition limitations for transitioning employees.
Employers don’t determine if deductible and out-of-pocket accumulation apply to transitioning members.
If the transition occurs in the middle of a plan year, the acquiring employer may be able to negotiate deductible and out-of-pocket credit under the new plan if requested in advance. This minimizes the impact of the change by eliminating the cost of timing to the employee.
Membership information is not properly transferred and integrated.
By utilizing benefits administration technology, manual processes can be streamlined to improve efficiency and ensure compliance.
Length of service credit is not honored.
In more scenarios, the acquiring employer can give transitioning employees length of service credit for 401(k) plans, PTO/Vacation, etc. Honoring the employees’ dedication to the former employer can go a long way in helping them adjust to their new employer.
Communication is lacking.
Change almost always negatively impacts an organization’s culture, even when the change is positive. Communicate the same message through multiple channels and make sure day-to-day supervisors always have the most updated and accurate information their employees need to create as safe and secure environment as possible for the transitioned employees. Create FAQs, a Q&A mailbox, talking points for external stakeholders and a website landing page to re-enforce your messages. Keep a running list of new information to make the next acquisition even easier.
Unique state benefits laws are not recognized or understood.
The company being acquired may have locations in states with unique benefits laws. California, Massachusetts, Texas, New York and New Jersey are just some examples. However, double check with the experts regarding the state(s) involved to avoid surprise fines.
Missed Form 5500 Filings are not identified.
If the target company has missed Form 5500 filings that have not been identified by the buyer, the buyer could face fines for not being ERISA compliant. Address any compliance shortcomings in the purchase agreement to ensure all remain liabilities of the seller.
COBRA compliance is not understood.
The buyer has responsibility for COBRA to the terminated employees of the acquired company. Buyers may ask for COBRA funds to be escrowed by the seller to remain compliant and reduce costs. Also, if not all employees transition as a result of the sale of the organization (stock or asset) and group coverage is unable to be maintained for all transitioning employees, the acquiring employer becomes responsible for the displaced employees.
Escrow obligations are not explicitly stated in the sales contract.
The sales contract must clearly state buyer and seller obligations to escrow.
Key Personnel is not identified or insured.
Each key person at the acquired company must be identified and added to Key Man life insurance and executive disability policies. If a tragic event happens and any key personnel die or become disabled, the acquired company could suffer significantly. Operating and financing agreements help buyers identify these key people and often require the purchase of Key Man insurance policies.
A merger or acquisition can be a risky undertaking for a company if extensive preparations are not made and due diligence is not performed. It’s imperative that both the buyer and the seller review and update their insurance coverages to ensure all risks are accounted for. All working parts of each company must undergo review. All business owners must remain sensitive and committed to employees’ wants and needs during the transition and all costs—hidden and disclosed—must be controlled.
BKS-Partners’ M&A team has expertise working with businesses to ensure their organization is adequately prepared and informed throughout the lifecycle of a merger or acquisition.