This blog post first appeared on RetirementTownHall.com. It is part of a blog series that highlights considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.
When considering health and welfare benefit plans as part of a merger or acquisition, remember that the due diligence you complete can impact the purchase price, uncover hidden risks, and be a critical component in the new company’s benefits strategy. Here are three steps you can take up-front to help ensure a smooth transaction and integration.
1. INITIAL DUE DILIGENCE REVIEW
A sound due diligence analysis will allow the buyer to make informative, data-driven decisions. A good analysis identifies items, such as a realistic evaluation of the cost of the health and welfare plan(s) being acquired, the baseline risk profile between the buyer and seller, an understanding of plan administration processes, including reporting and compliance risks, and any hidden risks, such as large claims or pending litigation. Specifically, this analysis should:
- Assess the seller’s existing compliance documentation and administration
- Plan documentation, participant notifications, and required notices
- Collective bargaining agreements
- Documentation of Internal Revenue Service (IRS) nondiscrimination rules compliance
- ERISA compliance in accordance with fiduciary, plan administration, and reporting/disclosure rules
- Identify potential liabilities, such as:
- Benefit commitments to employees, retirees, bargaining groups, executives, and terminated business units (this may require a review of employment practices as well as formal programs)
- Vendor relationships—contractual commitments, lawsuits regarding plan administration, and performance-related payments
- Financial liabilities—post-retirement benefit plans, incurred but not reported (IBNR) claims calculations for health plans, claims liabilities (large claims), and tax/regulatory penalties
- Other benefits—vacation/sick leave, severance plans
- Include retiree health commitments and other coverage as promised by seller
- Duration/extent of commitments and the extent of “vested” benefits as well as the buyer’s ability to amend or terminate the commitments
- Analysis of whether retiree benefit commitments are fully insured or self-funded
- Funded status of retiree commitments and coverages
- Compare benefit plan designs between buyer and seller to assess potential impact of plan design differences and different levels and types of benefits offered by both organizations
2. PLANNING FOR POST-MERGER CONSOLIDATION
After a sound due diligence analysis, it’s important to determine how the benefits for the post-acquisition organization should be structured. An experienced consultant can help guide you through the evaluation process, developing solutions that fit the requirements of the new company. Here are some things to consider as you optimize your new company benefits strategy:
- How do the workforce requirements and employee demographics vary?
- How large is the gap between the two organizations’ benefit programs (considering plan design, cost variations, vendor differences, etc.)?
- How different are the two company cultures and how do the benefit plans reflect those cultures?
- To what degree should benefit design and administration vary across subsidiaries or business lines?
- Should benefit plan administration be outsourced, co-sourced, or handled internally?
3. MANAGING THE MERGED ORGANIZATION
Once the deal closes, it’s time to look into future and execute an optimized benefits strategy for the new company. Depending on the business decisions considered above, the buyer may steer toward a particular future benefits strategy for the combined company. Below are two possible benefits strategies and considerations for each.
- Maintain separate plans: In a decentralized organization with multiple business units, this may be the preferred approach. It will be important to evaluate the impact of the controlled group rules when setting up the compliance strategy in this situation. A thorough review of all plan documents, contracts, and practices will be key to determine if plan amendments of other changes will be necessary. Division of responsibilities between the buyer and seller with respect to contributions, reporting, and administrative duties relating to the current plan year and the preceding plan year will need to be determined. The buyer will need to consider whether it wants to take the responsibility for the prior operation of a plan. This would include any penalties from prior violations, including minimum funding rules, reporting and disclosure rules, compliance with ERISA, etc.
- Integrate plans—terminate seller’s plan and integrate seller’s employees into buyer’s plan: This strategy provides for the most cohesiveness and integration among all employees involved. It allows for greater leverage with vendor negotiations. Consideration should be given to “right to change” or “termination of benefits” provisions within the seller’s existing medical benefits program (e.g., retiree medical benefits). Consolidation of vendors could be a major task. Lastly, consideration must be given for midyear plan changes and whether they will prompt items such as termination penalties and runoff termination liabilities. Overall, there are many health and welfare factors to be considered in an M&A transaction. To the extent these health and welfare factors create a liability to the buyer, it should decrease the purchase price. Similarly, if these factors represent a hidden asset of the seller, an increased purchase price may be appropriate.