When acquiring a spin-off - buying a subsidiary that will be standing on its own or integrated into the acquirer's other businesses - benefits are key to a deal's success and minimizing employee disruption. Successfully transitioning employee benefits in spin-offs presents unique challenges.
Before the acquisition, the spun-off business looked to its parent company for plan design, financial and IT support, benefits finance and accounting, vendor contracting, employee communications, compliance resources and governance and fiduciary processes.
When a company or business unit is spun-off, the new company is left without the support of a Mothership. One option is to continue existing plans through "shared services" for a short period following the transaction so that there is no interruption in benefits coverage. New benefits plans can be established during the transition period giving the spin-off time to design and implement its new program.
Shared service arrangements can help with transitioning many health and welfare plans. For insured plans, the broker and the insurance company may be able to duplicate the plans, and employees can stay on the current plan without interrupting coverage. For self-insured health plans, the seller will want the new owners to be responsible for the actual claims and expenses for the transferred employees.
Word of caution
A word of caution: When making these decisions for your new entity, recognize that local claims experience data is often unavailable and, therefore, self-insured costs can be an unknown exposure.
Avoiding coverage gaps Some types of employee benefits programs do not cover the spinoff's employees during a transition. Retirement programs risk becoming multiple-employer plans if they cover employees who are no longer part of the controlled group.
New retirement plans will need to be adopted to be effective on Day One, or there may have to be a "gap" period after the closing without retirement plan coverage.
Even though shared services arrangements can provide a transition period for some plans, it's important to get all the new plans in place as soon as possible. Extended transition periods leave employees still looking to the former parent company for key benefits at a time when their focus should be on their new, stand-alone company identity.
Starting from scratch
While it's important to take into account the benefits program in place prior to the acquisition, you have a unique opportunity to, in effect, start over. Don't miss out on the opportunity to create an updated, more cost-effective program that's better suited to the company and its employees.
You will want to look at more streamlined and cost-effective programs and processes. For example, this could be a good time to introduce a full suite of voluntary benefits, which help attract and retain employees without direct cost to the company.
Vendor management also is critical. Develop a comprehensive list of all plans, and product and service providers. Contact the product and service providers - and brokers, where applicable. Identify funding and financing arrangements for each of the plans, including transition arrangements.
You'll need to have new contracts, agreements and funding arrangements in place as soon as possible. Identify new vendors that may be needed to support stand-alone benefits plans.
Simultaneously, form your new benefits management team, identifying or recruiting internal expertise, and install administrative support systems needed after the acquisition. Then develop a timeline for implementing the new benefits program for all employees - those who transitioned and new hires.
Communicate often. Frequent and clear communication throughout the process will ease employee concerns and allow them to focus on the business.
Keep employees informed of the process you're following, your goals, and what remains the same and what's changing. Make sure the employees have timely information so that they can effectively make decisions as they enroll in new programs.
Benefits as a unifying force
Benefits should not become the source of anxiety for employees. Instead, benefits can be a key unifying employee-relations tool during a time of very significant corporate change.
Don't miss this unique opportunity to communicate the value of your benefits program so that it's not taken for granted.
Effectively communicating a well-designed and well-administered program can transform this time of uncertainty and stress for the workforce into an opportunity to affirm the employee focus of your new company as it bids farewell to the mother ship.
Donna Rhodes Joseph and Pete Tobiason are principals of Rhodes- Joseph & Tobiason Advisors, LLC, an independent employee benefits advisory firm headquartered in Stamford, Conn. They may be reached by phone at 203-883-8144 or by email at firstname.lastname@example.org.
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