Health and Welfare and 401(k) Plan Integration Issues in Strategic M&A Transactions: Important Diligence Topics and Best Practices
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Partner and Global Head of White & Case's Employment, Compensation & Benefits Practice Henrik Patel and Counsel Samantha Rozell co-authored an article titled "Health and Welfare and 401(k) Plan Integration Issues in Strategic M&A Transactions: Important Diligence Topics and Best Practices?" published by Benefits Law Journal.
In this article, the authors provide an overview of common integration-related issues that arise with respect to 401(k) and health and welfare plans in strategic mergers and acquisitions transactions.
Strategic corporate transactions (i.e., transactions where the buyer is an existing company or business with its own operations, corporate payroll and human resources ("HR") structure and benefit plans) pose a host of unique challenges for buyers, sellers, and/or targets, and their advisors. Among those are questions regarding how to approach health and welfare and 401(k) plan coverage for employees of the target business in a manner that protects buyers from assuming unwanted liabilities while preserving the benefit entitlements of the target’s employees with minimal disruption.
The structure of the transaction itself can introduce an additional layer of complexity. If an entity that sponsors the relevant 401(k) and health and welfare plans and programs is being acquired in a stock purchase or merger, these plans and programs will be assumed by operation of law, and as such, the default treatment is clear. If the buyer in such a stock sale or merger wishes to amend or terminate any target plan or program, it must take affirmative action to do so in a timely manner as required by various regulations and guidance (as discussed further in this article). However, in the case of a carve out transaction (whether structured as an asset sale, or a stock sale or merger wherein the assets and liabilities of a specific business line are poured into an entity, and that entity is sold to the buyer), the parties must clearly contemplate the treatment of these plans and programs, and the assumption and retention of assets and liabilities, at the time of the transaction, including whether transition services may be needed for a period of time post-closing for either or both parties.
This article provides an overview of common integration-related issues that arise with respect to 401(k) and health and welfare plans in strategic mergers and acquisitions ("M&A") transactions, and will discuss:
- The areas on which buyers their advisors should focus during diligence in order to best integrate a target’s health and welfare plans;
- Similar issues that arise with respect to 401(k) plans; and
- Some of the unique concerns surrounding health and welfare and 401(k) plans sponsored by professional employer organizations ("PEOs").
Our hope is that this article will provide buyers, sellers, targets, and their respective advisors with a general framework within which to begin considering the appropriate approach to integrating 401(k) and health and welfare plans in future strategic transactions. The reader should note that the key diligence topics we identify below are likely important to any buyer in any acquisition, whether or not it is the type of strategic acquisition on which this article focuses. However, because buyers in strategic acquisitions often have their own internal HR functions and administrators who will need to understand any issues with a target's plans, it is critical for a buyer’s legal advisors to thoroughly diligence these issues with a view toward key areas of concern for their client’s HR functional experts, and providing these HR experts with clear advice on next steps approaching, and integration following, the transaction closing.
This article was first published in Benefits Law Journal, Summer 2022, Volume 35, Number 2, pages 10–36.
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