TABLE OF CONTENTS

Employee Benefits Due Diligence for Buyers and Sellers

Human Resources Due Diligence for Buyers and Sellers

 

  • Review Documents: summary plan description, plan documents, insurance contracts, form 5500, stop loss policy, claims and utilization reports, employee communications

 

  • Employee Recruiting and Selection

 

  • Employee Training and Development
  • Review Plan Design: eligibility definitions, coverage details, how plans can be terminated, risk sharing arrangements, plan liabilities, funding, plan administration details

 

  • Personnel Records and Administration

 

  • Human Resources Information Systems
  • Review Plan Compliance: ERISA, HIPAA, COBRA, IRS, nondiscrimination, ACA, group health plan mandates, state law

 

  • Compensation and Performance Management Systems

 

  • Employee Benefits
  • Review Incurred but Not Reported Claims: final agreement should stipulate the responsibility for payment of these self-insured claims

 

  • Discipline Procedures

 

  • Termination Processes
  • Review Section 125 Plan: premium only plan, flexible spending accounts

 

  • Communications

 

  • Health and Safety
  • Review COBRA Obligations: determine whether buyer or seller is responsible for COBRA following the close of the transaction

 

  • Organizational Structure

 

  • Organization Culture
  • Review Retirement and Pension Plans: determine whether it is underfunded
  • Prior and/or Pending Legal Action(s) and Agency Audits

COBRA Obligations. 

If a plan is terminating, it is important to identify whether the buyer or seller is responsible for COBRA continuation coverage for an M&A qualified beneficiary. Note: Buyer and seller may contractually allocate COBRA liability as part of the reorganization.  


 

COBRA Principles 

Asset Sale

Stock Sale

General Rule: 

Selling group maintains a group health plan after the sale: 

Selling group has the obligation to provide COBRA coverage to M&A qualified beneficiaries 

 

Selling group discontinues any group health plan in connection with the sale: 

Buying group has the obligation to provide COBRA coverage to M&A qualified beneficiaries if:

  • The buying group maintains a group health plan and; 
  • The buying group is a successor employer that continues business operations of seller without interruption or substantial change.

 

Selling group maintains a group health plan after the sale: 

Selling group has the obligation to provide COBRA coverage to M&A qualified beneficiaries 

 

Selling group discontinues any group health plan in connection with the sale: 

Buying group has the obligation to provide COBRA coverage to M&A qualified beneficiaries if the buying group maintains a group health plan.

 

M&A Qualified Beneficiary:

In Connection with Sale: qualified beneficiary whose qualifying event occurred prior to or in connection with the sale

 

Prior to Sale: qualified beneficiary receiving COBRA as a result of employment associated with the assets being sold or the acquired organization

In Connection with Sale: qualified beneficiary whose qualifying event occurred prior to or in connection with the sale

 

Prior to Sale: qualified beneficiary receiving COBRA as a result of employment associated with the assets being sold or the acquired organization

 

Qualifying Event in Connection with Sale:

The covered employee (or the spouse or dependent child) must lose coverage under a group health plan of the selling group after the sale:

The covered employee doesn’t have to lose their job, but no qualifying event occurs if the buying group is a successor employer and the employee is employed by the buying group after the sale.

Qualifying event occurs only if the covered employee is no longer employed by the acquired organization after the sale: 

The sale is not a COBRA-qualifying event for the employee (or his or her spouse or dependent children), regardless of whether they are provided with group health plan coverage after the sale.

ACA Obligations. 

The ACA’s employer shared responsibility provision outlines certain obligations and potential penalties for applicable large employers (ALEs).  Thus, it is important for the buyer and seller to understand how the transaction will impact each company’s ALE status. 

 

An employer is an ALE if it employed an average of at least 50 full-time (FT) or full-time equivalent (FTE) employees during the prior calendar year. To avoid penalties, an applicable large employer must offer minimum essential coverage that is affordable and provides minimum value to substantially all (95%) of its full-time employees.



Seller Remains in Business After Purchase

Determining Applicable Large Employer (ALE) Status

Determining Who is Responsible for ACA Reporting

Buyer is ALE and Seller is non-ALE:

 

Buyer: Remains an ALE

Seller: Becomes an ALE upon purchase

Buyer: Report on employees employed under buyer’s EIN before and after purchase

Seller: Report on employees employed under seller’s EIN after purchase

Buyer is non-ALE and Seller is ALE:

 

Buyer: Becomes an ALE upon purchase

Seller: Remains an ALE

Buyer: Report on employees employed under buyer’s EIN after purchase

Seller: Report on employees employed under seller’s EIN before and after purchase

Buyer is ALE and Seller is ALE:

 

Buyer: Remains an ALE

Seller: Remains an ALE

Buyer: Report on employees employed under buyer’s EIN before and after purchase

Seller: Report on employees employed under seller’s EIN before and after purchase

Buyer is non-ALE and Seller is non-ALE:

Buyer: Becomes an ALE upon purchase if controlled group has 50+ FT/FTE employees

Seller: Becomes an ALE upon purchase if controlled group has 50+ FT/FTE employees

ALE Buyer: Report on employees employed under buyer’s EIN after purchase 

ALE Seller: Report on employees employed under seller’s EIN after purchase

Non-ALE Buyer/Seller: No reporting



Seller Dissolves After Purchase

Determining Applicable Large Employer (ALE) Status

Determining Who is Responsible for ACA Reporting

Buyer is ALE and Seller is non-ALE:

 

Buyer: Remains an ALE

Seller: Remains a non-ALE upon purchase; Dissolved = 0 FT/FTE employees 

Buyer: Report on employees employed under buyer’s EIN before and after purchase

Seller: No reporting

Buyer is non-ALE and Seller is ALE:

 

Buyer: Becomes an ALE upon purchase if buyer has 50+ FT/FTE employees after hiring any of seller’s employees

Seller: Becomes a non-ALE upon purchase; Dissolved = 0 FT/FTE employees

ALE Buyer: Report on employees employed under buyer’s EIN after purchase

Seller: Report on employees employed under seller’s EIN before purchase

Non-ALE Buyer: No Reporting

Buyer is ALE and Seller is ALE:

 

Buyer: Remains an ALE

Seller: Becomes a non-ALE upon purchase; Dissolved = 0 FT/FTE employees

Buyer: Report on employees employed under buyer’s EIN before and after purchase

Seller: Report on employees employed under seller’s EIN before purchase

Buyer is non-ALE and Seller is non-ALE:

Buyer: Becomes an ALE upon purchase if buyer has 50+ FT/FTE employees after hiring any of seller’s employees

Seller: Remains a non-ALE upon purchase; Dissolved = 0 FT/FTE employees

ALE Buyer: Report on employees employed under buyer’s EIN after purchase 

Seller: No reporting

Non-ALE Buyer: No reporting



ACA Obligations. Generally, a buyer must take into account an employee’s hours of service earned working for the seller prior to the transaction. Following a transfer, an employer includes hours of service earned in the first position either by (1) counting the hours of service using the counting method applied to the employee in the first position, or (2) recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position. Employers using the look-back measurement method may experience difficulties determining the employees status if the buyer and seller utilized different look-back measurement methods.


Determining Full-Time or Part-Time Status Under the ACA Look-Back Method

Employee transferring from a position to which one measurement period applies to a position with a different measurement period

 

Employees in Stability Period or Administrative Period

 

Employees Not in Stability Period or Administrative Period

In Stability Period: 

If an employee is in a stability period applicable to the first position as of the date of transfer, the employee’s status as a full-time or non-full-time employee for the first position remains in effect until the end of that stability period.

 

Not In Stability Period: 

The employee’s status as a full-time or non-full-time employee is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position.

In Administrative Period:

If a new employee is in an initial administrative period as of the date of transfer, the employee’s status as a full-time or non-full-time employee based on hours of service in the initial measurement period under the first position and applies from the start of the associated stability period following the end of that administrative period through the end of that stability period.

 

Not In Administrative Period: 

The employee’s status as a full-time or non-full-time employee is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position.

End of Stability Period: 

At the end of the stability period during which the transfer occurs, the employee assumes the full-time or non-full-time employee status that the employee would have under the look-back measurement method applicable to the second position, but including hours of service in the first position when applying that measurement method.

 


Frequently Asked Questions

What is the difference between an asset and stock sale?

Asset Sale: the purchaser does not acquire an ownership interest in a second company but rather purchases selected assets, and/or assumes certain liabilities, from the selling company - buyer generally becomes responsible only for those liabilities and obligations of the business that it affirmatively agrees to assume.

 

Stock Sale: One company purchases all of the stock or ownership interests in a second company, thereby acquiring the second company in its entirety or where a company purchases less than 100 percent of the stock of another company - purchaser takes all of the risks associated with the liabilities of the acquired company.


Do we have to notify employees of the impending transaction?

Generally, the employer does not have to notify employees of the impending transaction. However, the Worker Adjustment and Retraining Notification Act (WARN Act) requires certain employers to provide affected workers with 60 days advance notice of a plant closing or mass layoff. Employers are covered by WARN if they have 100 or more employees, not counting employees who have worked less than 6 months in the last 12 months and not counting employees who work an average of less than 20 hours a week. Private, for-profit employers and private, nonprofit employers are covered, as are public and quasi-public entities which operate in a commercial context and are separately organized from the regular government. Regular Federal, State, and local government entities which provide public services are not covered.


Plant Closing: Provide notice if the shutdown will result in an employment loss for 50 or more employees during any 30-day period.


Mass Layoff: Provide notice if there will be a mass layoff which will result in an employment loss at the employment site during any 30-day period for 500 or more employees or for 50-499 employees if they make up at least 33% of the employer's active workforce. 


Sale of Business: There is always an employer responsible for giving notice.

  • If the sale by a covered employer results in a covered plant closing or mass layoff, the required parties must receive at least 60 days advance notice; 
  • The seller is responsible for providing notice of any covered plant closing or mass layoff which occurs up to and including the date/time of the sale. The buyer is responsible for providing notice after the date/time of the sale;
  • No notice is required if the sale does not result in a covered plant closing or mass layoff;

An “employment loss” includes: (1) an employment termination, other than a discharge for cause, voluntary departure, or retirement; (2) a layoff exceeding 6 months; or (3) a reduction in an employee's hours of work of more than 50% in each month of any 6-month period.


If seller remains in business after the transaction, can buyer cover seller’s employees on its plan?

If seller and buyer are part of controlled group as defined by the IRS, the buyer can cover seller’s employees on its plan. If the buyer and seller are not a part of a controlled group, then the group could be a Multiple Employer Welfare Arrangement (MEWA), which poses additional issues for enrolling seller’s employees on the buyers plan.  For additional information on requirements for MEWAs, see MEWAs: A Guide to Federal and State Regulations.


What should the seller consider if it is terminating its plan(s)?

If the seller will terminate its plan in connection with the transaction, there are several items it should consider, which include but are not limited to:

 

  • ERISA Plan Terms Regarding Plan Termination
  • Providing Deductible or Other Plan Credits
  • Notice Requirements for a Material Reduction in Benefits or Termination
  • Disposition of Plan Assets
  • Plan Termination Date
  • Responsibility for Unpaid Claims
  • Handling of Disability Claims
  • Process for Enrollment in Buyer’s Plan
  • Employee Mid-Year Election Changes
  • COBRA Liability
  • Retiree Liabilities
  • Severance Agreements
  • Contractual Agreement with Carrier
  • Collective Bargaining Agreements
  • Form 5500 Filing

 

What happens to transferred employee’s FSA after the transaction?

In an asset sale, transferred employees who have elected to participate in a health FSA under seller’s cafeteria plan may continue to exclude the salary reduction amounts and medical expense reimbursements from gross income without interruption and at the same level of coverage after becoming employees of buyer either when seller agrees to continue its existing health FSAs for the transferred employees or when buyer agrees to adopt a continuation of seller’s health FSAs for the transferred employee.