Mergers, acquisitions, consolidations, or other reorganizations of a company can have a profound effect on employee benefit plans. For the purpose of this post, we’ll examine two common types of corporate transactions and the issues companies need to consider:
- Stock purchase – The buyer purchases all the stock of a company, and the seller does not retain any employees or benefit plans.
- Asset purchase – The buyer chooses which assets and liabilities, including benefit plans, to purchase.
Stock Purchase Transaction Issues
Do Benefit Plans Come with the Transaction? Unless the seller is directed by the buyer to do otherwise, the benefit plans will transfer to the buyer at closing. Buyers should review their plans as well as the seller’s plans to assess the need for any amendments.
What about 401(k) Plans?
Typically, the seller’s 401(k) plan will transfer with a stock purchase transaction unless the buyer specifically excludes the plan. If the buyers do not want the plan, it should be specified in the purchase agreement that the plan will terminate prior to closing. If the plan is terminated prior to closing, the buyer still assumes any plan liabilities during the period prior to termination and must wind down the terminated plan properly and in a timely manner following the closing.
What Happens to Group Health Plans?
Just like 401(k) plans, group health plans will either transfer to the buyer or should be terminated in connection with closing. Employees that transfer to the buyer with the transaction will be ineligible for COBRA, even if coverage is lost. Former employees that previously elected COBRA – or are in the election period – will continue to be eligible for COBRA.
What about Nonqualified Retirement Plans? Similar to 401(k) plans, nonqualified retirement plans will either come with the transaction or should be terminated in connection with closing.
What Happens to Flexible Spending Accounts (FSAs)?
Unless the buyer terminates FSAs, they will typically continue without interruption after the closing.
Asset Purchase Transaction Issues
Do Benefit Plans Come with the Transaction?
A buyer who wishes to retain the seller’s benefit plans should incorporate them as included assets and liabilities. The buyer may wish to ask for price concessions or additional assets to cover plan liabilities. If the buyer does not want to retain the seller’s benefit plans, they should be listed as excluded assets and liabilities.
What about 401(k) Plans?
The buyer will decide whether or not to include the seller’s 401(k) plan in the asset purchase transaction. Since the plan sponsor will change and service agreements will need to be assigned by the buyer if the 401(k) plan is included in the transaction, there will be additional contract diligence needed prior to closing. If the buyer elects to exclude the seller’s 401(k) plan, it will stay behind; however, the buyer should make sure that responsibility for the plan is assigned post-closing so that it doesn’t become an orphan plan. Any employee who is terminated due to the transaction is eligible for rollover distributions.
What Happens to Group Health Plans?
Just like 401(k) plans, the buyer will decide whether to include group health plans as part of the transaction. The default IRS rules stipulate that the seller is responsible for providing COBRA coverage to “M&A qualified beneficiaries” unless the buyer stops proving a group health plan in connection with the transaction. In that case, the buyer then becomes responsible for offering COBRA coverage to the seller’s former employees that are currently receiving COBRA coverage.
What about Nonqualified Retirement Plans?
If certain requirements are met, parties to an asset purchase transaction are allowed under 409A regulations to determine how employees who stay in their same
jobs with the buyer will be treated regarding separation of service. Under the “same desk rule,” the IRS provides that an employee who does the same work in the same location has not experienced a separation of service, even if there is a change in employer due to a corporate transaction. Typically, employees who do not transfer with the transaction are treated as being separated from service, which can result in distributions from the nonqualified retirement plan.
What Happens to Flexible Spending Accounts (FSAs)?
Employees who terminate employment with a seller will have their FSAs discontinued, but can be reimbursed for any pre-termination claims if the plan allows. If the seller agrees to transfer FSA account balances to a buyer’s FSA plan, the employees’ FSAs continue uninterrupted.
Related Content
Practical Guidance
- Corporate Transactions EBEC Resource Kit
- Cafeteria Plan Design and Compliance (IRC § 125)
- COBRA Compliance and Enforcement
- Fringe Benefit Rules (IRC § 132)
- Supplemental Executive Retirement Plan Design and Compliance
Anne Tyler Hall, Founding Attorney and Principal, Hall Benefits Law
As a business owner representing businesses, Anne Tyler Hall understands first-hand the importance of strategically-designed, legally- compliant benefit plans aimed at attracting, motivating, and retaining top employees. She also understands the importance of responsive and timely legal compliance guidance to businesses who are in six, seven, and eight-figure Internal Revenue Service, Department of Labor, or Department of Health and Human Services penalty situations.
Since January of 2018 the team of ERISA Attorneys at Hall Benefits Law has avoided and abated more than USD $70 million in penalties for plan sponsor clients, and Hall Benefits Law has been named the fastest-growing boutique ERISA firm in the United States by the Law Firm 500 three years running.
Ms. Hall is a proud graduate of the University of Alabama School of Law, and she earned her Master of Laws in Taxation from the prestigious Georgetown University Law Center. She enjoys spending time with her husband and their two young daughters.
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