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Last year, despite pandemic fears, companies took advantage of low interest rates to create an unprecedented increase in mergers and acquisition (M&A) activity. On a global level, more than 63,000 transactions worth $5.9 trillion closed in 2021, with the U.S. leading the way in deals worth $2.6 trillion, according to Refinitiv, a British financial market data firm. Rising interest rates, ongoing geopolitical concerns and other factors may slow the pace of deals in 2022, but many analysts expect M&A activity to remain high for the foreseeable future.

Company retirement plans and their participants are typically an afterthought when M&A activity is happening at such a rapid pace. While much can wait until the deal is done, it is important to focus on a few areas that plan sponsors often miss in diligence or are surprised to learn about when acquiring a company or being acquired themselves.

First, who is in charge?

It may sound elementary but clarifying which company/plan sponsor is the acquirer and identifying the specific team leading the transaction is very important for managing the benefit plans part of the M&A equation. This group needs to decide who is going to make the benefits decisions and how benefits are going to be offered going forward.

Following a thorough analysis of any current plans in place, the team should decide whether they will terminate the target company’s plan, operate both plans separately or merge the plans. It is also important to review whether any newly established or legacy plans will be able to pass coverage and non-discrimination testing.

If there are any concerns about the plan being tainted – in other words, featuring elements of non-compliance, a full compliance review should be completed during the sign to close period (usually anywhere from 30-60 days after the deal is signed). The compliance review process should include detailed review of items such as plan documents, Forms 5500, employee census data and coverage testing to assess whether there are points of non-compliance.

It also can be valuable to do a “winners/losers” analysis to understand which participants may benefit the most versus have take-aways under the new plan. After this assessment, the team can decide whether and how to compensate those who “lose” in the new plan for example, through an increased benefits, salary increase, bonus, etc.

Second, managing service providers

One challenge with service providers is that once a merger or acquisition is in motion, many vendors become less invested in supporting the plan because they assume they will no longer be servicing the plan post-acquisition. In most cases, they will eventually do their part but often won’t be very responsive or provide hands-on support to determine how to bring the new plan together.

Savvy plan sponsors find service providers with a vested interest in the new plan. Such a provider should have a handle on deadlines, compliance issues and any important details that cannot be missed in the new plan. For example, it is important to have a strong understanding of the Internal Revenue Service’s Rev. Rule 2004-11, also known as the coverage transition rule, which deals with non-discrimination requirements during an ownership change.

Another helpful step is to ask the service provider for a temporary team member familiar with special events such as plan mergers or terminations, as applicable. Often day-to-day teams are not familiar with the extensive list of actions which need to be taken which can result in project delays and/or compliance risks.

Third, communication to participants is paramount

Plan sponsors need to clearly communicate with employees how their benefits will be affected by a merger or acquisition. Depending on how the plans are handled going forward, these events can have a significant impact on participants – for example, some participants may need to pay off loans if a plan is terminated, causing an unexpected taxable event for those individuals. If circumstances are not communicated clearly and effectively, plan participants can be caught off guard, creating challenges for both participants and sponsors.

Employees often do what is easiest, which is typically inaction. Plan sponsors have recognized this and the use of auto-enrollment in 401(k) plans and annual auto-increases have significantly increased both participation and employee contributions to plans. Best practice is to assume many employees will not take action and structure the process in such a way these employees will not be disadvantaged.

Insight: Set yourself up for Success

Transitioning plans into a new organization takes a lot of effort. Now is the time to get organized – even if there isn’t a deal looming on the horizon today. While the basics of having a list of all service providers, testing results and making sure documents and operations mirror each other is essential, your philosophy on how you want your plan participants to receive benefits moving forward should also be a core focus.

If you have questions or need more information about employee benefit plans, contact Kevin Hamaker.


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