Are you noticing an uptick in merger and acquisition activity among midsize employers? I am. And it’s raising some interesting questions. For example, my client might call and say, “We intend to buy ABC Company on Sept. 1. We’ll continue ABC Company’s current benefit programs until our ensuing Jan. 1 open enrollment. Anything we should be thinking about?”
Given the significant benefit continuation implications of asset sales, I reply by asking these two key questions:
· Is this acquisition structured as a stock sale or an asset sale?
· Is your company named as a successor employer in the purchase agreement?
Usually, no one is immediately sure. But, once they check with the attorneys, the answers are often, “It’s an asset sale, and yes, we’re named as a successor employer.”
As a benefits consultant, I often feel a little uneasy or sheepish at this point, knowing that a whole team of expert accountants and attorneys has missed the benefit continuation implications. Or maybe they just didn’t consider them. Or maybe the terms just weren’t communicated precisely. Regardless of the circumstance, it feels awfully odd for me to be the one to point out that their benefit continuation strategy is foundationally flawed.
What are the general implications of an asset sale regarding employee benefit continuation?
· The benefit plan policies do not automatically transfer over from the seller to the buyer. The buyer must negotiate with the seller’s insurers and third-party administrators to transfer over the seller’s benefit plan policies. These negotiations require significant lead time, offer complexity and often aren’t feasible if the sale close date is rapidly approaching.
· The seller’s employees do not automatically transfer over to the buyer.
· Often, the seller intends to terminate its benefit policies shortly after the asset sale.
· If the buyer is named a successor employer in the purchase agreement, the buyer is usually compelled to offer COBRA continuation benefits to those experiencing a qualifying event because of the acquisition (of course, COBRA issues arise both in stock and asset sales).
It’s not hard to imagine a few nightmare situations emerging out this stew, right?
If the above terms are discovered six months out, the situation is naturally much more manageable than if they are discovered 30 days out. But, in my experience, the latter is becoming much more common.
It’s also much more manageable if the buyer intends to offer employment to all of the seller’s employees. In most circumstances, a successful strategy for the buyer to consider is negotiating with its benefit plan vendors to waive, as needed, the eligibility waiting period for its benefit plans so that the newly hired employees (i.e., the former employees of the seller) can join the buyer’s benefit plans immediately upon date of hire. The vendors will usually agree to this request.
Additionally, the seller can negotiate with the vendors to allow any former employees and dependents of the seller who are currently on COBRA continuation to transfer to COBRA continuation under the buyer’s policies. This aspect can be trickier. Regardless, the seller’s policies should not be terminated until all benefit continuation aspects are crystal clear.
Ideally, all of these negotiations and terms should be established well in advance under advice of legal counsel and be outlined in the purchase agreement. Additionally, individuals negotiating terms of the acquisition should, from the onset of due diligence, keep all key finance and human resources personnel informed on the structure and terms of the pending sale.
However, for reasons unknown to me, both of these ideal proactive steps seem to rarely occur. Should a colleague walk into your office today announcing a planned acquisition, my best advice is to immediately ask if the acquisition is structured as an asset sale or as a stock sale.
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