Health and Welfare Plans in Mergers and Acquisitions: An Overview

The Complexities of Employee Benefits in M&A Transactions  

While not the primary driver of M&A transactions, employee benefits can often be overlooked, leading to complex legal issues post-transaction. The corporate world is frequently unprepared for the intricacies of employee benefits law in M&A transactions, resulting in significant compliance issues and legal liabilities that could be avoided with proper due diligence. Given the multitude of M&A considerations, it is crucial to underscore health and welfare plans' most critical aspects and outline the beginning of the due diligence process. 

Liability and Responsibility 

While the nature of the transaction typically determines the party responsible for any plan liabilities, the buyer often ends up with the cleanup duty post-transaction. In a merger, the buyer assumes responsibility for the seller's plans. In contrast, in an asset acquisition, the seller retains responsibility for its plans. However, certain situations, such as the Consolidated Omnibus Budget Reconciliation Act (COBRA) rules, can reverse these outcomes unless the purchase agreement specifies otherwise.  

Along with COBRA, two other areas of primary concern for health and welfare benefits in an M&A transaction are plan Documents and the Affordable Care Act. 

Key Areas of Concern 

Plan Documents 

 Usually, all benefit plans are listed on the disclosure schedule of the purchase agreement. This list should include specifics on the welfare benefits plans. The lists can then generate a checklist of required items for each plan, such as the following:  

• Plan document and Summary Plan Description - It’s not unusual to see an Employee Assistance Program without either of these items 
• Plan filings - Form 5500, Form 720, Forms 1094/1095, etc. 
• Nondiscrimination testing - Has this been performed annually? 
• Insurance policies - How is the policy terminated, or can it be converted? 
• Vendor contracts - Does the buyer incur any contractual obligations?  

Affordable Care Act 

Assuming that either the buyer or seller is an applicable large employer (ALE), several considerations related to the Affordable Care Act (ACA) should not be overlooked. These considerations can significantly impact the transaction and the combined entity's ongoing operations. 

• Suppose only the assets of a selling company are acquired. In that case, the seller's employees in the transaction are treated as new employees of the buying company. That company is, therefore, responsible for ACA reporting for those employees from the date of acquisition. However, the selling company remains accountable for reporting before the date of employee transfer. 
• When the equity of an ALE or ALE group member is acquired, the seller's full-time employees will be considered ongoing full-time employees. ACA coverage must, therefore, be offered from the date of acquisition by the buyer. Employers should note that only one Form 1095-C per employer identification number may be issued for the calendar year reporting period. 
• The buyer is indirectly responsible for the target company's ACA obligations for previous years. These include timely and accurate reporting and employer-shared responsibility payments incurred before the transaction. 

COBRA 

The COBRA regulations allow the seller and buyer to contractually agree to allocate the responsibility for providing COBRA coverage. Otherwise, if the seller maintains a group health plan after the sale, the seller must provide COBRA coverage to M&A-qualified beneficiaries of the sale. Suppose the seller ceases to maintain a group health plan in connection with the sale. In that case, the buyer must provide COBRA coverage to M&A-qualified beneficiaries with respect to the sale if: 

• The buyer maintains a group health plan, and 
• In the case of an asset sale, the buyer is a successor employer. 

Each M&A transaction health and welfare checklist will be unique to the combined entities and their underlying benefits. 

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