Employee Benefits Mistakes that Impact Mergers and Acquisitions

Employee Benefits Mistakes that Impact Mergers and Acquisitions

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.

Cost

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.

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