Tag Archives: health & group benefits

Defined benefit (DB) plan considerations for M&As

This blog is the fourth in a series of six that will highlight considerations for and the impact of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

Transactions occur regularly and come in a multitude of structures and players. Sometimes they’re simple two-dimensional deals—one buyer, one seller—sometimes they’re multidimensional—multiple buyers and sellers, plus unions, government entities, federal agencies, etc.

Urgency usually is the call of the day. Properly and quickly assessing the deal landscape under a current lens, as well as a forward-looking post-deal lens, can be crucial for the deal to be successful for all involved.

The incidence of defined benefit (DB) pension plans requires separate expertise to be included on the due diligence and post-merger teams. The amount of work involved in this area can usually be quickly assessed by an experienced actuary. It may have little impact on the structure of the deal or it may drive large elements of the deal, significantly impacting the purchase price or killing the deal entirely.

CONSIDERATIONS
Below are a few elements to consider from the buyer’s perspective and some examples of the impact they can have on the deal:

Element Consideration Impact
Discount Rates Can vary significantly depending on different viewpoints and market fluctuations. Can impact annual costs, balance sheet entries, and funded status significantly.
Plan Demographics and Demographic Assumptions Can vary significantly from expectation.

For example, a business might have a pension plan with 10 times the number of plan participants as employees.

Review demographics assumptions used in the valuation compared with experience and critical plan provisions.

This can impact go-forward policies and plan operating requirements.

Key benefit provisions could be undervalued or not valued at all with significant liability underreporting.

Auditors Have varying practices.

For example, some audit teams allow companies to net supplemental employee retirement plan (SERP) liabilities against rabbi trust assets.

Accounting allowances vary significantly between auditors: acceptable to theirs may not be acceptable to yours.
Balance Sheets Only show net amounts. Can mask underlying plan size and corporate impact. Even the slightest movement in plan assets or liabilities can dramatically change balance sheet entries.
Liabilities Withdrawal liability. Can be surprisingly high.
  Management employment contracts. Usually trigger additional liabilities with change-in-control.
Termination liabilities. Buyer should be aware that ERISA or GAAP funded status may not be a good measure of the cost to terminate the plan.
Unpredictable contingent event benefits (UCEBs) that are due to plant shutdown or layoff. Buyer should be aware of these provisions and potential impact to cash funding and expense.
At-risk status. Plans with a low enough funded status will require additional cash contributions, special Pension Benefit Guaranty Corporation (PBGC) valuations and reporting, a potential freeze on benefit accruals, and restrictions on some optional forms of payment.
Funding Onboarding underfunded plan. Can affect entire controlled group executive nonqualified deferred compensation (NQDC) plans and loan covenants.
  Merging an underfunded plan. Can trip funding thresholds in combined plan with amplified effects.
  Synergy-driven plant closings. Can trigger unsought involvement of federal pension oversight agencies and massive accelerations in cash contribution requirements.
  Uncertified plan benefits.

 

Require additional work and perhaps additional liabilities.
  Seller may be obligated for continued, post-close contributions. Who is responsible, especially if agency agreements are in place?
Carryover and prefunding balances (credit balances). Large credit balances may mask upcoming cash contribution requirements.
  Contribution due dates.

 

Can cause surprises. Who pays, who deducts?
  Plans may have existing agreements with the PBGC. May require additional contributions.
  Project plan costs. Significant changes in cost might emerge in near-future years, impacting economics of deal.
Legal Noncompliant plans.

 

Bring significant resource diversions and legal liability.
  Current audits or investigations by the Internal Revenue Service (IRS), PBGC, or U.S. Department of Labor (DOL). May impact legal and financial obligations as well as reputational risks.
  Material claims pending or threatened related to the plans. Same.
Valuations Negotiated benefit increases or cost-of-living adjustments (COLAs) in collective bargaining agreements (CBAs) might not be fully reflected in valuations. Liabilities that are due to current contractual agreements may not be reflected in liability disclosures.

Additional retirement plan considerations include:

• Inventory discovery may lead to undisclosed plans and liabilities
• Carve-outs can spin plans many different ways, affecting future plan/corporate economics
• State of target’s plan administration could bring burdens
• Proper administration support for the pension plans
• In-house pension expertise evaporating on both sides
• Poison pills need valuation and assessment
• Foreign plan issues such as termination indemnities (if any)
• With the elimination of the Internal Revenue Service (IRS) approval process for individually designed qualified retirement plans, it will be important that plan changes going forward do not jeopardize the qualified tax status of the plans, upon random audits from the IRS.

Pension plans can add complexity to a merger or acquisition. It is important to involve an actuary in the process to identity and help mitigate risks.

Health and welfare plan considerations for M&As

This blog post is the third in a series of six that will highlight considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

When considering health and welfare benefit plans as part of a merger or acquisition, remember that the due diligence you complete can impact the purchase price, uncover hidden risks, and be a critical component in the new company’s benefits strategy. Here are three steps you can take up-front to help ensure a smooth transaction and integration.

1. INITIAL DUE DILIGENCE REVIEW
A sound due diligence analysis will allow the buyer to make informative, data-driven decisions. A good analysis identifies items, such as a realistic evaluation of the cost of the health and welfare plan(s) being acquired, the baseline risk profile between the buyer and seller, an understanding of plan administration processes, including reporting and compliance risks, and any hidden risks, such as large claims or pending litigation. Specifically, this analysis should:

  • Assess the seller’s existing compliance documentation and administration
    • Plan documentation, participant notifications, and required notices
    • Collective bargaining agreements
    • Documentation of Internal Revenue Service (IRS) nondiscrimination rules compliance
    • ERISA compliance in accordance with fiduciary, plan administration, and reporting/disclosure rules
  • Identify potential liabilities, such as:
    • Benefit commitments to employees, retirees, bargaining groups, executives, and terminated business units (this may require a review of employment practices as well as formal programs)
    • Vendor relationships—contractual commitments, lawsuits regarding plan administration, and performance-related payments
    • Financial liabilities—post-retirement benefit plans, incurred but not reported (IBNR) claims calculations for health plans, claims liabilities (large claims), and tax/regulatory penalties
    • Other benefits—vacation/sick leave, severance plans
  • Include retiree health commitments and other coverage as promised by seller
    • Duration/extent of commitments and the extent of “vested” benefits as well as the buyer’s ability to amend or terminate the commitments
    • Analysis of whether retiree benefit commitments are fully insured or self-funded
    • Funded status of retiree commitments and coverages
  • Compare benefit plan designs between buyer and seller to assess potential impact of plan design differences and different levels and types of benefits offered by both organizations

2. PLANNING FOR POST-MERGER CONSOLIDATION
After a sound due diligence analysis, it’s important to determine how the benefits for the post-acquisition organization should be structured. An experienced consultant can help guide you through the evaluation process, developing solutions that fit the requirements of the new company. Here are some things to consider as you optimize your new company benefits strategy:

  • How do the workforce requirements and employee demographics vary?
  • How large is the gap between the two organizations’ benefit programs (considering plan design, cost variations, vendor differences, etc.)?
  • How different are the two company cultures and how do the benefit plans reflect those cultures?
  • To what degree should benefit design and administration vary across subsidiaries or business lines?
  • Should benefit plan administration be outsourced, co-sourced, or handled internally?

3. MANAGING THE MERGED ORGANIZATION
Once the deal closes, it’s time to look to the future and execute an optimized benefits strategy for the new company. Depending on the business decisions considered above, the buyer may steer toward a particular future benefits strategy for the combined company. Below are two possible benefits strategies and considerations for each.

  • Maintain separate plans: In a decentralized organization with multiple business units, this may be the preferred approach. It will be important to evaluate the impact of the controlled group rules when setting up the compliance strategy in this situation. A thorough review of all plan documents, contracts, and practices will be key to determine if plan amendments or other changes will be necessary. Division of responsibilities between the buyer and seller with respect to contributions, reporting, and administrative duties relating to the current plan year and the preceding plan year will need to be determined. The buyer will need to consider whether it wants to take the responsibility for the prior operation of a plan. This would include any penalties from prior violations, including minimum funding rules, reporting and disclosure rules, compliance with ERISA, etc.
  • Integrate plans—terminate seller’s plan and integrate seller’s employees into buyer’s plan: This strategy provides for the most cohesiveness and integration among all employees involved. It allows for greater leverage with vendor negotiations. Consideration should be given to “right to change” or “termination of benefits” provisions within the seller’s existing medical benefits program (e.g., retiree medical benefits). Consolidation of vendors could be a major task. Lastly, consideration must be given for midyear plan changes and whether they will prompt items such as termination penalties and runoff termination liabilities. Overall, there are many health and welfare factors to be considered in an M&A transaction. To the extent these health and welfare factors create a liability to the buyer, it should decrease the purchase price. Similarly, if these factors represent a hidden asset of the seller, an increased purchase price may be appropriate.