A Really Basic Checklist for Employee Benefits in Mergers and Acquisitions

Lately, I have been fielding a lot of questions relating to employee benefits issues in mergers and acquisitions. Whether they be asset deals, stock deals, or straight mergers, due diligence about employee benefits should always come sooner rather than later. There are lots of checklists out there about things you need to look for and specific questions to ask, but what strikes me is that some of them overlook some of the basics that I ask first. So I thought I would share my initial questions when I am asked to consider employee benefit concerns in a deal.

1. What do the entities look like to begin with, and what will they end up looking like?

The structure of the entities before the transaction and after the transaction can tell us a lot about what might need to be done with the benefit arrangements. A parent selling a wholly owned subsidiary may have different issues than two small companies creating a joint venture. So before you do your employee benefit analysis, make sure you know where you have been and where you are going. Believe me, it matters.

2. What have you got that is not wages, and what will you keep giving?

It seems like a silly statement, but a good review should start with the assumption that everything provided to employees that is not a straight wage could be a benefit. Maybe it’s not an ERISA benefit plan, but possibly some type of "plan" or "program" that has to receive special treatment. Don’t assume that simply because it is not a qualified plan that it is not relevant for consideration. I have seen things like wellness programs, commuter benefits, pet insurance, and adoption assistance plans become last-minute problems that would not have been issues if considered in advance. So a real inventory is a census of everything you have (on both sides) and what you expect to give when you are done.

3. Who will still be employed when the dust settles?

Sometimes a merger eliminates employees. Or an acquisition can take one set of employees and move them to a new employer. To evaluate continuation (and COBRA) obligations, you have to know who will still be around and who will be losing their employment status. Do you have any obligations to retirees? What about people who retiree because of the transaction? Will job classifications change? You would be amazed at the amount of litigation that arises related to terminating benefits for former and continued employees that could have been addressed beforehand by simply considering who was being let go and who was being kept.

4. Do you have any unions involved?

Without going into too much detail, collectively bargained employee benefits issues can be a ticking time bomb for anyone who waits until the last minute to consider them. Make a list of all unions involved, both before and after, and include any multiemployer benefit fund to which there may be a contribution obligation. Be cognizant of possible successor liability for any delinquent contributions of the seller entity.

5. Who will be in charge of the details?

You would be amazed how many mistakes occur because everyone thought someone else was dealing with something. Decide on the front end who will coordinate the employee benefit issues, and if it is more than one person, set up regularly scheduled status calls or meetings to go over the steps that need to be taken. Involve service providers and fund professionals. Don’t wait until the last minute to discuss COBRA obligations with the COBRA administrator. Don’t wait until the day before the deal is scheduled to close to tell the 401(k) administrator that a plan is terminating. Advance planning cuts down on mistakes and, ultimately, costs.

6. Who will be left holding the bag?

When it is all over, someone has to be in charge of administering what remains. That person (or those people) should have both a future plan of action and historical knowledge. Make sure you collect prior plan documentation and census information before padlocking the doors of the old entity. The IRS never wants to hear that you can’t respond to an audit because the company you acquired forgot to send you their old plan records. Nothing is more frustrating than dealing with an "orphaned" employee benefit plan.
Certainly, these initial questions are not intended to cover the details about what each piece of due diligence looks like. But at the same time, true due diligence means not waiting until the last minute to address employee benefits concerns in a merger or acquisition transaction. Start the dialog early by asking these six practical questions, and the answers to each will guide you toward a successful transition.

—Keith R. McMurdy is a partner in the New York law firm of Fox Rothschild. His practice focuses primarily on labor and employment issues arising from the design, drafting, and administration of employee benefits plans, including: health, welfare, disability, retirement, and pension plans. Reprinted with permission and edited for this publication.