Employee benefits and business combinations.

AuthorRoehrick, Julie A.

When acquiring a business, companies need to consider numerous employee benefits issues. Although these issues can be crucial to a merger's success, they typically do not receive attention until after the primary feasibility studies are completed and the price negotiated. Before final negotiations, companies should identify potential payroll tax liabilities and any obligations under existing health and retirement plans.

If companies buy stock in a corporation, they are, in effect, "stepping into the shoes of the seller." In other words, the buyer can be a potential target for any claims that arose while the seller was in control of the corporation. These include unpaid wages and employment taxes, missed IRS filings, funding deficiencies in the pension plans, etc.

An asset purchase (rather than a stock purchase) can avoid some claims, but full immunity is not guaranteed. Recent court cases have held a new employer liable, even when only assets were purchased.

What about Health Plans?

If a buyer purchases a company and retains most of the existing employees, the buyer has to extend Consolidated Omnibus Reconciliation Act of 1985 (COBRA) rights to the employees who lose their old coverage. Under COBRA, terminated employees have the right to purchase continued health coverage for a limited time. While this right normally applies to the health plan the employee had until he was terminated, it can also apply to the new owner's health plan if the original plan was dropped in favor of the new one.

A buyer should conduct a due diligence review and search for potential health coverage issues or COBRA violations. By including comprehensive and strong representations, warranties and indemnification provisions, the buyer will be protected from potential COBRA violations.

An important issue for self-insured heath plans is determining who is liable for claims incurred but not reported. A buyer will want to take a look at the history of a company's health claims to evaluate the probability of incurring a major uninsured claim in the near future. An increase in stop-loss coverage may be warranted.

A buyer should scrutinize all plans for any postretirement and postemployment benefits and properly record any liabilities discovered.

The concern that comes with acquiring a company with a defined benefit plan is whether the plan has been properly funded. Defined benefit plans are designed so the plan's assets will equal the promised benefits when an employee...

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