America's Benefit Specialist March 2023

EMPLOYEE BENEFIT CONSIDERATIONS

(unless COBRA applies). This is because, in some cases, a retire ment plan covering multiple entities may be treated as a single employer plan under the affiliated service group rules, whereas a group health plan covering the same group of employees would be a MEWA under DOL rules unless the requisite level of common ownership is met (generally at least 80%). A number of other employee benefit laws and regulations are also implicated as part of deals, including the ACA, CO BRA and nondiscrimination testing for self-insured medical plans, cafeteria plans and FSAs. AFFORDABLE CARE ACT Perhaps the most significant ACA consideration in M&A transactions is the employer shared responsibility provision (ESRP), which applies to employers with an average of 50 or more full-time-equivalent (FTE) employees in the prior calendar year. If there are two or more entities in a controlled group, then the 50 FTE count applies across the controlled group. Thus, it is important to have controlled-group status determined post-deal. For example, an M&A deal could con vert two non-ALEs into an ALE as of the start of the following year. Moreover, a deal between a non-ALE and an ALE can in stantly transition a non-ALE to an “ALE member” at the time of closing. In that scenario, the new ALE member must offer health coverage to avoid potential penalties. Note that while ACA reporting is performed at the EIN level, employers must identify all controlled-group members on Form 1094-C. It is also critical for buyers to review seller’s ACA reporting as part of the diligence process. If the selling entity is (or was) an ALE, buyer should request copies of Forms 1094-C and 1095-C filed with the IRS for all prior tax years (and confirm that forms were timely furnished to participants), any letters the employer may have received from the IRS related to their filings, and the current cost of coverage information so that an affordability analysis can be completed. This will give the buyer critical potential liability information to consider in the deal process. COBRA Federal COBRA rules require that health plans sponsored by employers with 20 or more employees allow employees to extend their benefits if they experience a loss of coverage after a qualifying event, such as termination of employment or reduction in hours. As with the ACA, COBRA obligations apply on a controlled-group basis. Further, COBRA generally applies to seller’s current CO BRA participants and its employees who experience a quali fying event as a result of the deal. As a general rule, if seller’s plan terminates due to the sale, then the buyer assumes the seller’s COBRA obligations for both current COBRA enrollees and seller’s employees who experience a qualifying event as a result of the deal. If the seller’s plan continues after the deal for a short period of time or longer, then the parties may

negotiate who assumes the COBRA obligation. For an asset deal, the default is that the seller is obligated to offer COBRA, so long as the selling group maintains a plan after the sale. This is the case even for employees hired by the buyer. FLEXIBLE SPENDING ACCOUNTS M&A transactions occurring during the seller’s plan year may result in complications for the seller’s health FSA. An M&A transaction mid-year will generally cut short the 12-month plan year of the seller’s FSA. When this happens, there are several options for the parties to consider: 1) Seller’s plan terminates early and employees make new elections under buyer’s plan. Unused amounts are forfeit ed upon termination. 2) Seller’s plan terminates early but, if the plan years are the same, seller’s plan may transfer FSA balances to buyer’s plan as described in Rev. Rul. 2002-32. (This treatment is available in both asset and stock deals.) 3) Seller’s plan completes its plan year and employees remain eligible. This approach is typically available in the stock deal context. There are pros and cons to all the above options, therefore, it is important for the buyer and seller to coordinate with counsel to determine the best approach. CONCLUSION These are some of the more common employee benefit plan issues to consider in M&A transactions. Other considerations include Form 5500 filing requirements and implications to retirement plans. Thus, it is important for employers to work with counsel knowledgeable on employee benefits issues when working through a business transaction.

Stacy Barrow is a partner at Barrow Weatherhead Lent LLP, a boutique employee benefits, executive compensation and employment law firm located in Boston. Stacy has been licensed to practice law for over 20 years and has been practicing law in private practice for 15 years. Stacy has extensive technical knowledge and experi

ence designing and implementing health and welfare plans that meet the numerous and intricate requirements of state and federal law. For the first five years of his career, Stacy served as in-house counsel to a prominent employee benefits and group health insurance brokerage and consult ing firm. He was an associate lawyer with K&L Gates and Proskauer Rose prior to co-founding Barrow Weatherhead Lent in 2015. Stacy holds a B.A. in Psychology from Brandeis University and a J.D. from Hofstra University School of Law and is licensed to practice in the Commonwealth of Massachusetts.

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