Thankfully, mergers and acquisitions continue at a good pace even in this impacted economy. We do still see buyers and sellers that struggle with employee benefit due diligence issues though. Deal counsel often gets calls from their clients – after closing – about what wasn’t spotted. For instance, a call from a buyer in a stock deal, three months after closing. The buyer received a letter from the IRS assessing six-figure penalties due to the seller’s Affordable Care Act violations for three prior years. The seller’s employees who handled benefit plans are gone. No one has records of which employees were offered health insurance or whether the required forms were filed with the IRS. What to do? Looking at the reps and warranties and arguing about indemnification will take time, effort, and dollars, and will not resolve the immediate issue with the IRS.
As another example, both buyer and seller are more than peeved because the acquired employees are not happy after the dust has settled. The employees got new health coverage mid-year and all of their deductibles and out-of-pocket limits started over at zero. To add insult to injury, their outstanding 401(k) loans are being called. Buyers and sellers generally want acquired employees to be happy and motivated when the deal is done, not angry due to perceived “takeaways”. These issues can be avoided (or at least communicated in a better and more timely fashion) with some up-front planning for the transition. Clients often don’t think about how benefit changes may impact employees at the ground level until after the deal has closed, and by then they may be dealing with angry employees.
Employee Benefit Plan Due Diligence
Employee benefit plan due diligence has practical, not theoretical, issues that make it necessary in almost every deal. Analyzing operational compliance issues and addressing the transition of employee benefit plans needs to be done before the deal closes. The benefits vendors and consultants are not going to spot these items, even if they are told that a deal is happening before the close. Most employee benefits issues have quantifiable exposure that can be factored into the deal terms if issues are timely identified. The scope of due diligence in this area is also easily budgeted and quantified – if you know what you are doing. Getting good results for buyers and sellers requires more than just a robust set of reps and warranties.