Mergers

1
Mergers Acquisitions Issues Raised by Health
Benefit Plans

• Jasmine Villaflor Hernandez
• Anna Rubinstein
• FIN434 Employee Benefits
• December 4, 2007

2
Overview of Presentation

• Defining key terms
• Pre-merger issues
• Post-merger issues
• Additional thoughts

3
Mergers Acquisitions

• Commonly recognized business transactions that
  fall
• under the MA umbrella
• Asset purchases where one company acquires all
  or part of the target company
• Stock sales target company becomes a subsidiary
  of the surviving company
• Mergers target company completely mergers with
  the surviving company which assumes all
  responsibility for the targets assets and
  liabilities

4
Pre-Merger Issues Stock Deals

• Stock deal benefit plan options
• In these situations, the buyer decides how he
  will merge the plans. Four main options exist
• Continue the targets plan
• Terminate the targets plans and distribute the
  accumulated benefits, if a distribution is
  allowed
• Stop benefits from accruing, and simply pay
  benefits when they come due
• Merge the targets plan into its own plan

5
Pre-Merger Issues Employee Benefit Plan Due
Diligence

• A consequence of not conducting thorough
• due diligence
• The failure to notice certain issues may lead to
  overstated purchase prices and the assumption of
  unnecessary risks.
• Three main types of due diligence
• Technical
• Economic
• Documentary

6
Pre-Merger Issues Employee Benefit Plan Due
Diligence

• Economic due diligence to prevent exposure
  originating from retiree medical expenses,
  executive contract provisions, or unawareness
  that the targets pension plan is under-funded

• Technical due diligence making sure that a
  plans terms, operations, and discrimination
  tests follow the rules set by the IRS
• Smaller firms are more likely to run into
  problems associated with plan qualifications

7
Pre-Merger Issues Employee Benefit Plan Due
Diligence

• Documentary due diligence
• All qualified plans need formal plan
  documents, which are the subjects of either IRS
  opinion letters to the sponsors of the documents
  (banks, brokerage firms, mutual funds, etc.) or
  letters of determination to the plan sponsors
• If a plan document does not have a current letter
  of determination, need to investigate why

8
Pre-Merger Issues Specific 401(k) Issues

• An MA involving 401(k) plans often has
• two specific issues the target and survivor
• should address
• If the merger occurs mid-year, both firms need to
  discuss is who will be responsible for making the
  required matching contributions
• - In many cases, the buyer takes on that
  responsibility, but the purchase price is
  adjusted to reflect that fact

9
Pre-Merger Issues Specific 401(k) Issues

• (2) After 401(k) plan termination, the survivor
  must also decide whether it will allow
  distributions from the terminated plan to be
  accepted as rollovers into the new plan.
• Qualification issues
• Increased assets can affect top-heavy rules
• Administrative costs decrease

10
Pre-Merger Issues Specific 401(k) Issues

• Participants are allowed to borrow money from the
  plan, and many have outstanding loans at the time
  the plan is terminated.
• What they can do with the money
• Repay the loan before the plan is terminated
• Allow the acquiring firm to be substituted as the
  obligee on the loan and roll it over to the
  targets plan
• Allow an employee to borrow money from the
  surviving firm, pay back the loan from the
  terminated plan, and eventually pay back the new
  loan

11
Pre-Merger Issues Employee Communication

• Good communication with the employees of both
  firms should be a vital part of a merger
• Both the target and the surviving firms may be
  uncertain as to how the benefit plans will change
• Hold employee information sessions and discuss
  new events to keep employees as calm and as
  productive as possible

12
Post-Merger Issues Transition Periods

• Transition Period period of time from
  acquisition until the conglomerate of employers
  (purchasers) verifies the targets plan complies
  with minimum federal and state guidelines
• Rule The targets plan complies with minimum
  
• requirements, so long as the minimum coverage
• requirements for each member of the group were
• met before the acquisition of the target and
• coverage under the plan does not significantly
• change during the transition period.

13
Post-Merger Issues Consequences of Over-Funded
Defined Benefit Plans

• Conduct thorough
• pre-merger due diligence
• Reduce excise tax to 20 by using the total
  excess amount to fund replacement plan, or
  increase benefits
• Avoid federal, state and local income taxes
• Negotiate price of transaction to reflect extra
  costs
• Avoid all taxes by absorbing the total
  reversionary amount

• Fail to conduct thorough
• pre-merger due diligence
• The excess of the FMV of the plans assets over
  the plans present value of its obligations is
  subject to sponsor-level income taxes
• Reversionary amount incurs an additional 50
  excise tax
• Substantial federal, state and local income taxes
  

14
Post-Merger Issues Same Desk Rule

• Purpose to regulate distribution of 401(k)
  deferral contributions

15
Post-Merger Issues Due Diligence Checklist
16
Additional Thoughts Foreign Employee Benefit
Plans

• Consider implications of buying and maintaining
  foreign benefits plans
• Administrative costs
• Additional communication strategy
• Both sides should consult with local benefit
  consultants or accountants for a comprehensive
  assessment of liabilities under those plans
• Regional offices