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What Happens to a Health Plan during a Merger or Acquisition?

By: Kevin Brady. Esq.

While businesses who are considering a potential merger or acquisition have a lot on their plates, one thing that should always be addressed is the impact that the transaction will have on the benefit plans of both the buyer and the seller. While it probably does not represent the biggest concern, overlooking the potential impact on benefit plans can cause major headaches when it comes to potential mergers and acquisitions.

Because the impact on the benefit plans will often be determined by the nature of the transaction and the specific agreement between the buyer and seller, it is important that both parties are aligned when determining how employees affected by the merger or acquisition will be provided benefits after the transaction is complete.

For our limited purposes, there are typically three types of transactions when it comes to mergers and acquisitions; an asset sale, a stock sale, and a merger.

In an asset sale for example, the buyer will typically purchase selected assets from another business (i.e. a particular department, facility, or service line). The employees who are affected by the transaction are typically considered terminated and immediately rehired by the new employer. The buyer does not have a legal obligation to hire those employees but often will do so if it aligns with their business practices. Those employees (while they may not notice a significant change in their employment or benefits) are most likely going to be considered terminated and immediately transitioned to the new employer’s health plans. Generally speaking, buyers do not continue ERISA benefit plans in asset purchases. Some, if not most, continue to offer similar benefits either under an existing employer group health plan or a new plan established after the purchase of the assets. If the buyer intends to offer similar benefits under their existing plan, they must ensure that their plan allows coverage for these individuals.

On the other hand, in the event of a stock purchase, the buyer will typically “step into the shoes of the seller” in terms of its rights and responsibilities as it relates to ownership of the business (including ERISA plans). The employees of the seller are not considered terminated in the event of a stock purchase (although this does not guarantee future employment) and ERISA plans in effect at the time of the sale are typically continued after the stock purchase has taken place.

Finally, in a merger, two entities will combine to become one business entity. In this situation, similar to a stock purchase, the employees are not considered terminated at the time of the merger and if an ERISA plan was in effect at the time of the merger it will likely be continued. However, the impact on a particular entities benefit plan will often be determined based on the specific agreement between the parties.

As the nature of the transaction will have a major impact on benefit plans, it is always important to discuss the intent of both parties as it relates to their employees and those employees’ benefits. Often times, a potential merger or acquisition will include a thorough review of an entity’s compliance as well. Has the seller complied with the strict requirements to file form 5500s? Is the plan properly funded? Does the plan document itself allow for another employer to continue benefit under the plan? These are all questions, among many more, that should be asked and answered before moving forward with a potential merger or acquisition.

Finally, the buyer or the new entity (in the event of a merger), must ensure that they are compliance as it relates to their new employees and the benefits being offered to them. Buyers and sellers who could find themselves in a potential merger or acquisition should keep these things in mind as they move forward with those decisions. While a potential merger or acquisition can be a great thing for those involved, it would be a shame for unidentified issues with a benefit plan to hold things up or even prevent a potential transaction.