Connections for Success



M&A Could Be the Next Challenge for Plan Sponsors… Are You Ready?

Despite fears over the COVID-19 pandemic, companies took advantage of low-interest rates to create an unprecedented increase in mergers and acquisition (M&A) activity in 2021. 

Company retirement plans and their participants are typically an afterthought when M&A activity is happening at such a rapid pace. 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.

Who is in charge?

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 facing non-compliance, a full 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 a 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 an analysis to understand which participants may benefit the most versus having takeaways under the new plan. After this assessment, the team can decide whether and how to compensate those who may be at a disadvantage in the new plan by offering increased benefits, salary increases, bonuses, etc.

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 will not 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 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 that need to be taken which can result in project delays and/or compliance risks.

Communication with participants is paramount

Plan sponsors need to 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. A 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.

Set yourself up for success

While rising interest rates, ongoing geopolitical concerns and other factors may slow the pace of deals in 2022, many analysts expect M&A activity to remain high for the foreseeable future. Transitioning plans into a new organization takes a lot of effort. Having a plan in place today — even if there is not a deal looming on the horizon — will help you be prepared to act when that day arrives.

If you have any questions, please contact Ken Kobiernicki or your ORBA advisor at 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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