Foreign acquisitions of U.S. companies have risen in recent years, and that trend is expected to accelerate.
Recent U.S. tax cuts should make American companies even more attractive because of higher profits from lowered corporate tax rates. However, foreign companies should be wary that these acquisitions often bring unexpected complications as a result of the complexity of U.S. employee benefits.
While Americans are used to saving for retirement and getting health insurance through employers, many foreign executives learn about these things only when they make their first U.S. corporate acquisition.
In countries from China to Italy, many of these benefits are handled at the national level. Certain countries have socialized retirement and medical programs that are automatically provided to its citizens. However, foreign executives have to quickly learn the U.S. workplace is different.
Indeed, the success of any deal depends on benefits — from payroll, vacation policies, health insurance plans to deferred executive compensation — being handled correctly as soon as an acquisition closes.
In addition, they need to know whether the newly acquired company will come with human resources staff or whether those functions will remain at the head office of the selling company. The good news is that many deals include a transition services agreement where the seller agrees to administer payroll, healthcare and retirement benefits for a few months to one year — a grace period for the buyer to put in place all the required infrastructure.
Foreign companies can try to negotiate with the selling company for concessions to ease the transition. For example, some sellers will agree to spin off a pro rata portion of their retirement plan to the new company, allowing benefits to move seamlessly from one employer to the new employer. (Some sellers will not do that, because of incentives they may have to maintain a certain amount of assets within their existing plans.)
When the foreign owner has no HR, accounting or payroll functions in the United States and the U.S. operation being bought has none of those departments either, the buyer can ask that key benefits staffers from the selling company are included in the deal, ensuring that HR and benefits operations continue as before. The alternative is hiring people and putting systems in place in a hurry — in the 60 days during which a deal is typically negotiated — or outsourcing that work to a professional employer organization.
Companies can engage vendors like ADP and Ceridian to provide bundled services for payroll, health benefits and 401(k) plan administration. However, best-in-class service for all these benefits typically requires using separate vendors for each service.
Typically, six issues cause the most headaches for executives from foreign companies:
Payroll. The most important thing in any acquisition is that staff can be paid on Day 1, otherwise employees will be angry. The acquiring company needs systems in place to know what payroll taxes have already been paid by each employee year-to-date, and how much each employee has paid in Social Security. Other vital payroll information includes knowing what time-off benefits are: Does the company have a set amount of time off, or are vacation days and sick days separated? Does the company have an overtime policy? Understanding the status of every individual with regard to these variables informs how they are paid post-acquisition.
Retirement benefits. Similarly, executives need to know what plans are in place and what employee contributions the company matches, and whether that is discretionary or not? Executives need to understand a variety of legal attributes of these plans — for instance, is there a plan trust/trustee; is it a safe harbor plan or not; are benefits collectively bargained for certain employees, and how does the plan communicate with participants?
See also: 7 signs of a successful 401(k)
Human Resource Information Systems. HR technology needs to be in place so that the new employer understands what elections employees have previously made. If those systems don’t come with the acquisition, the new employer may need new systems. Depending on the size of the operation, that can mean anything from building a spreadsheet system to a PeopleSoft software installation costing millions of dollars. HR information systems are vital — for instance files for worker compensation, healthcare and for personnel must be separated by electronic firewalls.
Welfare benefits. Executives at the acquiring company must understand what benefits are in place, including healthcare, retirement, short-term disability and dental care. Executives should understand what benefits must remain in place and where they have flexibility to change. For example, any benefits tied to a union contract cannot be changed without negotiating first with the relevant labor organization.
Deferred executive compensation. Acquisitions can trigger (large) deferred executive compensation payments, so buyers should negotiate with sellers about how to handle such remuneration to avoid a costly surprise later.
Participant loans from 401(k) plans. A change of ownership typically means that participant loans from retirement accounts must be paid back or recognized as income. Buyers can negotiate with sellers to ease this burden by rolling over those loans to the new plan. However, since some third-party administrators of retirement plans will not accept such rollovers, this issue has to be handled deftly.
Taking the time to avoid disruption during an acquisition will result in happier employees, maintaining their goodwill and productivity, and ultimately, the value of the acquired company.
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