Case Studies in Mergers and Acquisitions

Transcription

1 Case Studies in Mergers and Acquisitions Virginia Krieger Sutton VKS Consulting; Account Executive Johnson & Dugan Virginia K. Sutton, QKA, QPFC Virginia is a Investment advisory representative of Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, VKS Consulting and Johnson & Dugan Insurance Services Corporation are separate and non-affiliated companies. Johnson & Dugan CA Insurance License

2 Virginia K. Sutton, QKA, QPFC Virginia K. Sutton specializes in 401(k) defined contribution plans, helping clients regarding all phases of their qualified retirement programs, including plan design, investment selection and review, compliance, vendor assessment, plan conversions, employee education, and mergers and acquisitions. Virginia is a member of ASPPA s government affairs DOL subcommittee and ASPPA s affiliate NAPA, the National Association of Plan Advisors. She is past chair of ASPPA s participant communications and chaired the 401(k) Plans Subcommittee ( ). Virginia is an account executive/consultant for Johnson & Dugan Insurance Services Corp. Virginia is an Investment advisory representative of Global Retirement Partners, LLC, a registered investment advisor. She is a registered representative with LPL Financial, Member FINRA/SIPC. Global Retirement Partners, LLC, Johnson & Dugan Insurance Services Corporation, and LPL Financial are separate and non-affiliated companies. Case Studies in Mergers & Acquisitions For Each of the Case Studies, Keep the Following Questions in Mind: How the structure and timing of the transactions impacted the plan sponsors' options for their 401(k) plans; How the plan sponsors navigated the process before and after the transactions; How does logistics and personnel influence decisions & the process? What are intended/unintended compliance consequences? What is biggest issue/challenge when companies come together? How effective communication and timing helped or could have helped with the whole process 2

3 M&A Concepts and Vocabulary Asset Sale The Cake Layer by Layer When a company buys another company s component parts, it is considered an Asset Sale. Assets (and sometime liabilities) are purchased; 401(k) may stay behind Employees have term date and rehire date The 401(k) is responsibility of prior plan sponsor Stock Sale The Cake Slice by Slice When a company buys another company s entire stock (can be by cash or use of its own stock) it is an Stock Sale Purchase of all assets and liabilities Employees are NOT given term/rehire date 401(k) becomes the responsibility of the acquiring company as the successor plan sponsor unless its terminated prior to close of sale M&A Concepts and Vocabulary 410(b)(6)(c) Transition Period The regulations apply to an asset or stock acquisition, merger or other similar transaction involving a change of employer of the employees of a trade or business [[Treasury Reg (b)-2(f)]* *Employee Benefits in Merger and Acquisitions By Ilene Ferenczy 3

4 M&A Concepts and Vocabulary 410(b)(6)(c) Transition Period What & When? If a plan has satisfied coverage testing requirements prior to an M&A transaction and there is no significant change in the plan s design or coverage other than the influx or outflow of employees because of the transaction itself, the plan is treated as satisfying the coverage requirements during the transition period. [IRC 410(b)(6)(i)]* The Transition Period begins on the day of the transaction and ends on the last day of the plan year following the plan year in which the transaction occurred.* *Employee Benefits in Merger and Acquisitions By Ilene Ferenczy M&A Concepts and Vocabulary 410(b)(6)(c) Transition Period What is the bottom line? When there is M&A, the plan sponsor can take the transition period to evaluate the new entity employee population and 401(k) plans and determine the best way to integrate them During the transition period, each plan operates independently There has been some discussion, but generally it is accepted that coverage testing (as well as ADP/ACP) for the combined new entity/controlled group post acquisition applies to the plan year following the year-end of the transition rule* *Employee Benefits in Merger and Acquisitions By Ilene Ferenczy 4

5 Case #1: I m Taking you Over The Fact Pattern East Coast Tech Company acquired West Coast Tech Company for Stock & Cash. Companies had a relatively long due diligence period prior to close of sale Plans are of similar size Liability containment is greatest concern by acquiring company Acquiring company has advisor whose firm also provides wealth management Case #1: I m Taking you Over Decisions East Coast Tech and West Coast Tech agree that the West Coast Tech 401(k) will be terminated prior to the close of the acquisition. Resolution to terminate the 401(k) is executed at board meeting prior to meeting when final shares are tendered. Fiduciary committee agrees to file Form 5310 Letter of Determination on Plan Termination West Coast Tech Service provider is engaged to prepare filing West Coast Tech Advisor continues through the end of the acquisition calendar year to assist committee and HR staff 5

6 Case #1: I m Taking you Over Decisions East Coast Tech allows new contributions to start first of the month following acquisition date No payroll change; contribution file sent to East Coast Tech Recordkeeper Employees provided information to set up their investments/account in the East Coast Tech 401(k) Plan Both groups are tech savvy so online enrollment and communications are permitted West Coast 401(k) participants allowed individual rollovers to East Coast Tech 401(k) East Coast Tech record-keeper does a batch process of rollovers for employees who submit rollover requests East Coast Tech Advisor requests list of all participants and balance amounts to assist with rollovers Case #1: I m Taking you Over Discussion What Worked Liability containment Acquiring company plan takes on more additional assets from rollovers Acquiring company advisors have opportunity with rollovers Clear messaging to participants once timetable established Side Effects Employees lost 1 month of contributions but otherwise immediately eligible for acquiring company 401(k) Form 5330 Filing-Still Going Missing documentation of prior plan merges of acquired plans must be tracked down IRS has yet to rule (its been over 1 year) Institutional knowledge drain 6

7 Case #2: Swallowing the Whale- The Fact Pattern Foreign Parent Company has small US Subsidiary 35 sales and leadership personnel Company located in Florida Most tenured US employee has been with company for 4 years Foreign Parent Company buys US based Manufacturing Company in Q Cash acquisition Manufacturing company has 550 employees; some with 20+ years experience Company is located in New York Key personnel from the Foreign Parent are given contract employment at both companies to oversee the acquisition Case #2: Swallowing the Whale- The Fact Pattern Each Plan is a 401(k) Safe Harbor Plan 100% to 5% match; this is the only current contribution to each plan; the NY 401(k) had previously funded a discretionary match The Florida 401(k) has immediate eligibility; the NY 401(k) has a 1 year/1000 eligibility requirement Florida 401(k) is with mutual fund bundled record-keeper in small-market program Plan costs are paid directly by plan sponsor NY 401(k) is with group variable annuity contract with TPA Plan costs are paid via investments 7

8 Case #2: Swallowing the Whale- Decisions Deal closes in Q1-2016; Plans will merge Because both plans are safe harbor, January 1, 2017 will be plan merge date Plan will retain immediate eligibility with any pay-period entry Advisor is asked to compare plan design & costs There is clear cost savings to move plan from GVA to Mutual Fund Record-keeper. Participants further benefit because plan sponsor will continue to pay plan service provider and advisor costs Decision to move NY 401(k) to Florida 401(k) Mutual Fund RK ERISA Counsel engaged to compare plan documents & prepare plan governance documentation Advisor asked to provide project oversight & employee communication plan Case #2: Swallowing the Whale- Challenges Mutual Fund Recordkeeper considers combined group still small market because anticipated assets less than $5M Geography & experience of HR team Foreign Parent requires way to divide service invoices for divisional billing Payroll integration & data management Two payroll vendors Global mobility of workforce Employees move from India to US payroll but will return to work for Foreign Parent Company Using technology for employee communications Florida Company very tech savvy Few NY Company employees have computers; there is low plan participation 8

9 Case #2: Swallowing the Whale- Compliance Issues Safe Harbor Preservation Plan document amendments Timing of asset transfer & new contributions SOX & Safe Harbor Notice Payroll integration & data management NY Company has weekly and bi-weekly payroll cycles, but has been remitting only bi-weekly Transfer of loan information/data Global mobility of workforce Contract employees from India on US payroll who return to Foreign Parent Company: no distributions allowed Paper communications for NY Company Case #2: Swallowing the Whale- Discussion What Worked ERISA Counsel provided plan review support and governance documentation Multiple communications via tech and paper were provided to employees; on-site face to face meetings were able to be scheduled prior to blackout Plan assets and records transferred timely & RK conversion team was able to get plan out of black out in 3 weeks Ongoing Issues RK Account Manager and Advisor didn t always speak the same language Data management! Census data rehire dates misloaded Divisional recordkeeping Payroll process review and start of weekly remittance Reports must be custom run for invoice accounting Special situation communications for employees moving between US and India 9

10 Case #3: Private Equity Roll Up Take 1 The Fact Pattern Private Equity Company owned West Coast R&D Company expands through cash/stock acquisition of East Coast Family Owned Business Stock/Cash acquisition; East Coast Owners are bought-out Controlled Group between East & West Coast Companies, but no other controlled group relationship between any other companies owned by Private Equity Co West Coast R&D Company approximately 95 employees East Coast Business has 45 employees. Private Equity Co has told West Coast CFO that more company acquisitions are forthcoming to expand operations Case #3: Private Equity Roll Up Take 1 Plan Merge-Decisions Acquisition closes in March The CFO decides to merge plans October 1 The company starts to make matching contributions to the acquired company plan July 1 in order for the plans to be equivalent prior to the plan merger West Coast Plan Doc is amended to grandfather past service for vesting and eligibility; full year comp will be used for testing and match calculations Employees are provided education meetings and opportunity to set up their accounts in West Coast Plan Plan assets and records transfer, and merge ends black out period by mid-october 10

11 Case #3: Private Equity Roll Up Take 1 Discussion What are compliance issues that Bi-Coastal will face? Compliance testing by bundled service provider What is the 5500 participant count for 1/1 of plan merge year; for the year post merge? Is there any issue with West Coast making match contributions to the East Coast 401(k) prior to merge? What were the biggest integration challenges? Payroll and Data! What went well? Plan communication and asset transfer Case #4: Private Equity Roll Up Take 2 Fact Pattern Bi-Coastal Medical Device Company s Private Equity Parent acquires Facility in the Midwest Asset Purchase Acquisition of workforce (350 employees); building; equipment; facility; brings total workforce count to 550 Owners of prior business given cash for assets; owners are not acquired 401(k) plan is NOT acquired; it stays behind with business owners After 3 years, the deal closes July 27 th Employees are considered terminated and rehired by Bi-Coastal Coincidentally, Bi-Coastal and Midwest Facility plans recordkeeper is the same company 11

12 Case #4: Private Equity Roll Up Take 2 Decisions Bi-Coastal has immediate eligibility and monthly entry dates Bi-Coastal has on-line enrollment features with its recordkeeper Plan is not amended; so all 350 new hire acquired employees become eligible to participate on August 1 Acquired workforce is not tech-savvy Advisor must custom design enrollment forms because recordkeeper can not generate them Company handles education meetings, and provides enrollment forms Company does the best it can to enroll participants, but contributions start on second payroll cycle in August Case #4: Private Equity Roll Up Take 2 Discussion What are compliance issues that Bi-Coastal will face? What issues could have been mitigated through: Plan amendment Plan communication What were benefits/challenges from having the same recordkeeper partner for both plans? 12

13 Case #4: Private Equity Roll Up Take 2 Discussion What Worked Liability Containment Asset sale meant Bi-Coastal is not responsible for any of Midwest's 401(k) compliance issues Employees were familiar with RK website and call center access Ongoing Issues Midwest went from autoenrollment to pro-active enrollment. Because RK won t process paper enrollment forms, HR must enter paper based enrollment decisions to system RK would not batch process rollovers, nor do internal wire transfer of participants accounts Data management; Example: Hours were not remitted on census file, so vesting was not properly updated on website for participants Case Studies in Mergers & Acquisitions- Closing Thoughts The structure and timing of the transactions impacts the plan sponsors' options for their 401(k) plans However, company events, not ERISA will most influence decisions It s the little stuff that creates the biggest issues DATA, DATA, DATA People are people, and change is scary TPAs have tremendous value add when working in partnership because RK systems can t make judgement calls or interpret data 13