Employee Benefits Can Spring Costly Surprises in Mergers/Acquisitions

By Longfellow Benefits Jan 2, 2008
You’ve scrutinized the deal until your eyes hurt, but if you haven’t examined employee benefits carefully, you haven’t done your job in mergers and acquisitions (M&A) due diligence, says Patrick J. Haraden, director of employee benefit services at Longfellow Benefits.

“If you don’t review benefits and take the right steps, it could cost your client plenty and cause employee dissatisfaction,” says Haraden, whose Boston-based firm advises New England employers on benefit plans.

If your organization has employees in Massachusetts or will gain them via the acquisition, the new entity must comply with the state’s new health care law, he points out.

“Employee benefit costs may continue after acquisition,” he adds. “These are significant liabilities that may not be on balance sheets or readily known or available. They can impact the fair purchase price or terms of the deal.”

Post-acquisition employee benefit costs can be
a significant liability.

COBRA's 'Poison Pill'

COBRA can be a poison pill, according to Haraden. The seller is obligated to make health insurance available under COBRA if a group health plan is maintained after the sale. The buyer must make COBRA continuation coverage available if the selling group ceases to provide any group health plan or the buying group is considered a successor employer. All current COBRA participants, COBRA eligibles in the notification period and employees on leaves of absence should be divulged.

“M&A agreements should allow access to each other’s COBRA records for at least 36 months after close,” Haraden recommends.

Massachusetts-Style Provisions Spread

Under the mandatory health care law, most Massachusetts employers must have a section 125 cafeteria plan and must not discriminate in their fully insured medical benefit offerings, Haraden notes.

“It’s still early and difficult to evaluate impact for M&A due diligence,” he says.

Connecticut, Missouri and Rhode Island also require section 125 plans that give employees the opportunity to pay for benefits on a pretax basis. California was close to adopting other aspects of the Massachusetts model.

“Involve your employee benefits broker or consultant early. They most often have the required documents and expertise, and they have a vested interest in a good outcome,” Haraden advises.

And whenever possible, get data directly from vendors like insurance companies and 401(k) managers.

“Trust, but verify,” Haraden concludes.

This article is adapted and reposted with permission from Longfellow Benefits, a Boston-based insurance brokerage and consulting firm.

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