Mergers and acquisitions activity continued to flourish in 2015 – as did the legal developments affecting employee benefit plans in the M&A context. This article provides a brief summary of some of these new developments, as well as some practical steps that can be taken in order to mitigate the M&A ris ks for both buyers and sellers.
1. ERISA Successor Liability Imposed in 2 Recent Circuits Involving Asset Sales.
Two recent cases in the 7th and the 9th Circuits have held that successors in an asset sale transaction can be held liable under ERISA’s withdrawal liability provisions (which apply to employers that contribute to multi-employer pension plans). Successor liability for asset buyers in the labor and employment context is not unheard of - prior cases have held that asset purchasers can be liable under ERISA if there is both a continuation of the business and the purchaser was on notice about the liability. However, these two cases take this a bit further. First, in Tsareff v. ManWeb Services, Inc., 794 F. 3rd 841 (7th Cir. 7/27/2015), the 7th Circuit held that a purchaser could be on “notice” of the liability even if the liability was only contingent. Then, the 9th circuit followed suit by imposing liability in a situation where the buyer retained seller’s customers, even though no customer lists were sold. Resilient Floor Covering Pension Trust Fund v Michael’s Floor Covering, Inc., 801 F. 3rd 1079 (9th Cir. 9/11/2015).
Practical Tip: Buyers will want to be aware that withdrawal liability is an issue any time a deal is being done with a company that contributes to a multi-employer pension plan, even if the transaction is structured as an asset purchase, and protect themselves with sufficient indemnities and reserves or specifically assume the pension obligation and price accordingly. Sellers will want to address their own potential withdrawal liability with their advisors before entering into a transaction and consider alternatives (possibly including a pre-sale bankruptcy filing). See ERISA Section 4204.
2. ACA Employer Reporting (Including M&A) Begins in Early 2016.
M&A transactions will affect the new required reporting under the Affordable Care Act, beginning with reports filed in 2016 for 2015. The employer mandate portion of the AffordableCare Act took effect in 2015. Beginning in 2016, “Applicable Large Employers” are required to provide notices to employees and are also required to file reports with the IRS with respect to the health care insurance provided to its employees. Failure to timely file these new required reports (or to correct improper reports) can result in significant fines and penalties (which were substantially increased last year under the Trade Preferences Extension Act of 2015). Note – in order to satisfy this requirement, all filers will be required to specifically identify and report the other members of its controlled and affiliated service groups (determined based on the definitions historically used for retirement plan purposes). Thus, employers who are involved in any sort of change in their controlled or affiliated service group will need to take that into account when preparing and filing these reports, e.g., if a subsidiary is sold during the year, it is still reported. And, Applicable Large Employer status is based on the size of the entire employer group, so even small employers who are in a controlled or affiliated service group which is an Applicable Large Employer on an aggregated basis will also be required to file.
Practical Tip: Sellers will want to confirm buyer’s compliance with ACA and these new reporting requirements. Buyers will want to make sure that they are both complying with ACA and properly reporting, including an analysis of their controlled or affiliated service groups under retirement plan standards for each month of the year. In addition, all employers required to file should set up policies and procedures for (a) filing the forms, (b) correcting incorrect filings as soon as possible and (c) handling the inevitable penalty appeals that will be needed, e.g., where employees mistakenly obtain coverage on an exchange, or an employer simply makes a mistake in their own reporting.
3. Major Cutbacks to the IRS Determination Letter Program Announced.
In 2015, the IRS reversed course on 70 years of taxpayer assistance by announcing that it was ending its program of issuing favorable determination letters on amendments to individually designed qualified retirement plans such as 401(k) plans, pension plans and ESOPs. See IRS Announcement 2015-19, July 21, 2015. The IRS is continuing to issue clarifying guidance, as well as promising more guidance to come. See Rev. Proc 2016-6 and IRS Notice 2016-03, January 4, 2016.
Practical Tip: Review standard purchase agreements and update representations and warranties to reflect the new reality (many form agreements ask a seller to both represent that they have a current favorable determination letter and to provide a copy). Consider whether a new updated determination letter is warranted and can be obtained – the IRS did announce that it would still issue determination letters to both start up and terminating plans, as well as possibly in certain M&A situations. For all employers, it will be important to take steps to help assure compliance. Many, if not most, individually designed plans could switch to a pre-approved type of plan document. The IRS has provided an extended deadline of April 30, 2017 to do so for new adopters of pre-approved defined contribution plans.
* This article is a reprint of an article published by NAMWOLF in February, 2016.
© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of March 31, 2016.