Ask the Expert, Benefits

Ask the Expert: Transitioning Employees to Acquiring Company’s Benefit Plans

Our business is being acquired and our employees will become eligible for the acquiring company’s benefit plans. What are we required to do in order to terminate our benefit plans including our cafeteria plan? Do we need to file anything or provide official communication to employees?

Thank you for your inquiry regarding transition of employee benefits as a result of pending merger.
In general, your benefits providers (current and future) and the counsel and executives who are structuring the acquisition will be the best source of information and guidance in making a smooth and worry-free benefits transition for your employees.

Mergers and acquisitions are very unique and detailed transactions, so the best practices for managing benefits transition for one corporate acquisition may not be the best options available for another. This is doubly so when you add in the customizability of benefits plans, particularly cafeteria plans, for not just one, but two employers.

Some decisions will depend on the structure of the acquisition. For example, will the acquired business close entirely and cease to exist upon completion of the deal, or will this business continue to exist as a shell or subsidiary for an additional period?

These details may affect COBRA administration (both for employees who become COBRA eligible prior to the acquisition and for employees, if any, who do not continue employment after the deal is complete). These matters may also affect the decision of when to terminate the selling company’s group health coverage.

Additionally, there may be questions regarding treatment of deductibles under the new plan – will transferred employees lose credit for deductible amounts already paid prior to the acquisition? Also, consider whether the acquiring company’s insurer requires new hires to undergo a waiting period before benefits eligibility.

If so, will this waiting period be waived for transferred employees? Will this require an amendment to the Summary Plan Description? These are questions that only your benefits providers will be able to answer and/or structure according to the needs of your changing business.

You may also wish to reference my response to your earlier question regarding FSAs. Depending on the type of acquisition your companies have structured (asset purchase vs. stock purchase) and the cooperation of your benefits providers, you may be able to structure a transfer of certain cafeteria plan contributions so that your participants do not forfeit their FSA contributions.

Alternatively, if this type of plan is not an option, your current benefits provider can also give details on whether your cafeteria plans include services such as grace periods and spend-down provisions that would allow employees to submit claims against their remaining balances after the completion of the merger.

Unfortunately, despite the complexity and lengthy negotiation that is necessary for successful mergers and acquisitions, HR personnel are often left out of the loop until “the deal has already been done,” so to speak. This places HR in a difficult position of ensuring that matters such as employee transfer and benefits administration were properly considered and accounted for within the transaction.

Therefore, we suggest actively recruiting the assistance and guidance of the executives and counsel involved in the acquisition to answer these questions, and others that may arise, as soon as possible. This not only ensures that your employees receive a smooth transfer of their benefits, but also that any existing benefits liabilities – for example, COBRA obligations – were properly considered and negotiated as part of the purchase agreement.

For benefits administration and due diligence information on a variety of benefits options, including retirement and deferred compensation benefits, you may also find the guidance in this article helpful.

Once you have determined and negotiated the transition plan for your current employees, then your benefits providers will be able to assist you with any official notices, communication, and documents as needed and required (Summary Plan Documents, COBRA continuation information, etc.)

At this time, you will also have a better idea of what employees will receive after the transition and how issues such as deductibles and waiting periods will be handled, so you can communicate on behalf of the company and better reassure doubtful employees with clear and honest details (while, of course, being free to explain that some decisions may still be pending.)