Why buyers need to pay attention to employee benefits

Employee benefits can be critical to the success of an M&A deal’s integration phase. If handled poorly, the process of transferring and restructuring benefits might alienate key employees — and even expose buyers to legal claims.

To avoid such consequences, review your target company’s current benefits package before the deal closes. In particular, keep an eye out for potential risks and liabilities and work to structure a benefit rollout (and revision, if needed) early in the postmerger process.

Due diligence

Once deal negotiations begin, you should perform due diligence on the seller’s benefits programs. This can include:

  • Compensation packages,
  • Health plans,
  • Retirement plans,
  • Employee stock option plans, and
  • Other incentives such as tuition reimbursement, leadership development and recognition programs.

Your M&A advisor can help you determine which documents require reviewing. But in general, you’ll want to look at plan descriptions, annual reports, notices and amendments made to coverage, and audits and actuarial reviews.

Retirement plans

Employee retirement plan offerings have the potential to create major legal headaches. So start the review by ensuring that the company’s plan complies with the Internal Revenue Code and Employee Retirement Income Security Act (ERISA).

Be on the lookout for underfunded pensions. A defined-benefit pension plan typically has a minimum funding requirement. If the plan is inadequately funded or has made poor investment choices, you could be on the hook for outstanding obligations to the target company’s employees.

Also review 401(k) offerings to ensure they’re current with IRS regulations. These plans must pass annual nondiscrimination tests designed to prevent them from benefiting highly compensated employees at the expense of lower-paid ones.

Health care offerings

Employee medical plans are another minefield. Examine your seller’s health care offerings to ensure they’ve met Affordable Care Act (ACA) provisions. As part of the Employer Shared Responsibility provision of the ACA, companies that don’t provide “minimum essential coverage” may have to pay a penalty. If your target company owes but hasn’t made this payment, you could be responsible for it. Your advisor can help you determine the selling company’s compliance and any cost implications.

You should also review the company’s continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). And be sure to note any health care–related agreements with former employees, such as a guarantee of lifetime medical coverage at a fixed cost. Such agreements can represent heavy financial obligations, and may require some alterations as part of the transaction.

Anticipate challenges

Once you have a solid grasp of the selling business’s various offerings, come up with a transition plan. Start working on any major changes — such as moving your acquisition’s employees to your health care plan — as soon as feasible. If the health coverage costs employees more or features fewer benefits, be prepared to meet possible legal challenges or employee attrition.

If you intend to terminate your target company’s pension plan, anticipate and budget for penalties or liabilities you may incur. And if you plan to downsize your acquisition’s workforce, get up to speed on the company’s severance plan and change-in-control agreements.

A tricky process

Handled poorly, employee benefits can represent major obstacles to the integration process and long-term success of an acquisition. If you face obligations to an underfunded pension plan or employee resistance to switching health care packages, it’s best to know before you close the deal so you can factor such challenges into the sale price.