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Assessing Employee Benefits Prior to Mergers, Acquisitions & Divestitures

Failure to examine the operations side of the equation in the preparation for a potential acquisition is an all too common mistake that leaves the company vulnerable to a significant level of risk and liability. When u​nfunded liabilities and low-performing plans enter the picture, they can change everything. Ideally, the company should take advantage of a pending or potential acquisition as an opportunity to review cost/benefit analyses, identify cost-saving opportunities and examine whether more aggressive contribution strategies could present significant savings. It’s absolutely vital to delve into these details before a purchase price is settled.

Mergers and acquisitions are daunting. Due diligence paves the way for a smooth transition. Doing your homework involves a thorough analysis of how the changes will impact and be impacted by employee benefits. Of particular importance are the valuation of outstanding claims from self-funded plans and underfunded defined benefit accounts—or any other liability that could wreak havoc on the numbers.


Asset or Stock Sale

Liability is determined by the type of sale, and liabilities are of paramount importance when it comes to employee health plans. Self-funded plans are often accompanied by outstanding claims—debts that must be paid. Those potential payments become an immediate liability to the acquiring company. Company restructuring can reconfigure benefit costs and shift liability for employees covered by COBRA, who are frequently much more costly to cover than active employees. Thorough digging into health plan data may identify large potential future liabilities—something that’s important to account for in the due diligence part of the process. The buyer can actually negotiate who will be responsible for COBRA in the purchase agreement.

Pension liabilities are also dependent on sale type. Employees’ eligibility for pensions and payments follow the same path as a terminated employee in the case of an asset sale. Defined benefit plans can be trickier. Entity purchases allow the buyer to institute its own 401(k) plan or to keep it wholly owned. When a parent company offloads a subsidiary, it faces a different set of challenges compared to what two small companies will when they’re joining forces.

Health and Welfare Plan Liabilities

Self-funded plan liabilities are tied to plan performance. Whatever the sale type, they require the company to set aside a reserve to cover liabilities and pay claims for medical and dental coverage, reimbursement of medical expenses, health spending accounts and the legal obligation to extend coverage for some employees, as well as for the protection of employees’ health information. A careful accounting of plan performance is vital to ensuring that the reserves in place are sufficient and that plans aren’t underfunded.

Changes in health care plans have the potential to upset employees. Such changes must be handled and communicated carefully to establish a positive relationship between employees and a new company as they move forward. Existing company culture plays a role in employee attitudes and must be taken into account.

Retirement Plan Liabilities and Protected Benefits

Pension plans fall under the scope of a company buyer’s liabilities in an entity purchase, and the buyer can’t dissolve protected benefits for those who have already earned them. Eligibility and accrual rates can only be altered for new employees moving forward, not retroactively. Profit-sharing, 401(k) plans and deferred compensation plans are important liabilities to evaluate. Also consider and evaluate stock options and employee stock bonus plans to avoid overlooking costly expenditures.

Nonqualified Deferred Compensation Plan Liabilities

As far as the books are concerned, nonqualified deferred compensation plans are both assets and liabilities, whether those liabilities are funded or unfunded. In the case of pension plans, real money should already be set aside to pay the costs. That may not be true of deferred compensation plans, so they can pose a significant risk to the buyer, who owns the liability immediately if a typical change of control benefit is included in the contract.

Employee Policy Issues

Employee costs can add up quickly, especially if the company intends to decrease the workforce. Benefits such as sick pay, vacation pay, severance pay and signing bonuses must be paid and may account for a significant outlay if many personnel are terminated at once.


Managing Expectations

It’s important for the CFO and HR professionals to work together, addressing hidden and contingent responsibilities and liabilities, including those associated with self-funded health plans. Careful teamwork reduces financial risk and sets up plans for managing COBRA costs and employee management. When a radical shift in company culture occurs, the team must actively manage employee perceptions and expectations throughout the transition.

Personnel Planning

When two or more companies merge, it’s fairly common to eliminate redundant employees or to bring people from one organization to work in another. Careful accounting is a helpful tool to manage the associated costs of employee benefit and retirement plans. Job reclassification may also affect benefit eligibility.

Evaluating Coverage

Plans that are ideal for one company don’t automatically work well in a more diverse environment or a firm with a wider geographic employee spread. When structural changes are inevitable, so is a re-evaluation of the benefit plan, which needs to provide coverage to employees in new and different regions.

Communicating the Transition

Information sharing is the best way to keep employee morale up and avoid serious conflicts surrounding cultural shifts. Wise management plans ahead, sharing information regularly to ensure a smooth transition. Build a timeline and map out important changes in order to schedule clear paths of communication. The initial communication should offer acquisition details and explain the upside of the coming changes. Next, employees need to know about any changes to benefit programs and how those changes will impact them. Be sure to communicate about extensions to an existing plan and share pertinent details about ramping up with new carriers.

It’s ideal to communicate changes to benefits in one comprehensive document and meeting to avoid misunderstandings and omissions. Many companies who understand the sensitivity of the process hire outside firms to manage a benefit transition. The best of these firms know what to tell employees and when to tell them, how to keep morale up and keep dangerous gossip and misinformation to a minimum.


New leaders need to understand the benefit cost implications for the short- and long-term. A solid HR team can underscore the organization’s stability, even through changes in culture and processes. Ongoing communication remains an important factor as the transition progresses.

In an expanded company, new players should be introduced and employee expectations should be clarified. Sharing information helps quell employees’ fears of the unknown. Service providers and fund professionals can act as valuable partners in this process, offering the benefit of their experience and knowledge to help the company focus on important details associated with 401(k) termination and health plan obligations.

As each step completes, the team must continue to measure projections against performance and make necessary adjustments. Monitor the shifting company culture and employee attitudes. In the event that a particular change has had a negative effect on morale, look at scaling the change back or breaking the transition into smaller pieces that can be phased in over a longer period of time that will allow employees to adjust.


There’s no shortage of risks in the complicated world of mergers and acquisitions, and the results of a mistake can linger for many years. It’s much wiser to avoid mistakes with due diligence than to try to clean up a catastrophe after the fact. Firms with experience can offer extremely valuable insights and tips to identify and manage the important details throughout the transition and avoid expensive surprises.

Experienced employee benefit specialists already know the ins and outs of health and wellness plans, retirement and pension programs and deferred compensation. They offer trusted advice in choosing such plans and collaborate with you to communicate with employees throughout the process. This avoids the hassle of getting new players up to speed; communication is handled by the expert who already understands the plans in depth. Their HR expertise allows them to create a clear benefit guide following a merger to streamline the communication function and deliver a unified message to employees.

Experienced health, wellness and retirement benefit staff can make you aware of red flags and point you to smart planning strategies that account for legal compliance issues, identifying the proper paperwork and spotting potential risks.

A comprehensive assessment of the company’s employee benefits programs is an enormous but worthwhile task as a firm embarks upon a merger or acquisition. Professionals can help the company understand how these programs affect a purchase price in the due diligence phase. They’re also available to lend a hand in sensitively managing the programs and liabilities in order to build a solid foundation for future profitability and a positive company culture for many years to come.

Doug Ramsthel is vice president, Burnham Benefits Insurance Services and Darin Gibson is owner and president, Burnham Gibson Financial Group, Inc.

Burnham Benefits Insurance Services, Inc., is one of the largest California employee benefits consultants’ brokerages, and amongst the few to specialize solely in employee benefits, and Burnham Gibson Financial Group Inc., is a full-service financial services firm that helps corporate and individual clients accumulate wealth, manage risk and plan for the future. For more information visit and


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