Employee Benefits Mergers & Acquisitions Subcommittee Defined Benefit Plans 2011 Midyear Meeting Jeffrey Lieberman Mitchel Pahl January 21, 2011 Introduction Defined Benefit Plans A defined benefit plan is a pension plan that contractually promises a level of benefits at retirement based on a specified formula. Participants do not have an individual account. Sample Formulas: final average earnings; career average; and flat benefit. Cash Balance and Other Hybrid Plans - IRS Finalized Hybrid Plan Regulations and proposed additional clarifying regulations (October 2010) 2 1
Types of Acquisitions Stock Purchase Merger Asset Purchase Initial Considerations: Does the Buyer want to continue to incur the expenses involved in sponsoring and maintaining the plan? What are the liabilities associated with freezing/terminating/continuing the plan? Do the employees have the expectation that the benefit from the plan will continue? What is the impact to benefit levels if the plan is discontinued? Consider timing and required actions: Section 204(h) notice; actuarial calculations for asset transfer. 3 Due Diligence Checklist The plan and trust agreement, including amendments, and restatements; All IRS and DOL submissions, IRS rulings, DOL Advisory Opinions; SPD and summaries of all material modifications, testing data; Copies of all contracts with third party providers (actuaries, etc.); All actuarial and investment reports, annual reports, including schedules; Any litigation and claims for benefits involving the plan; Actuarial analysis of current funded status of the plan; Copies of all agency filings related to plan document defects or operational failures; and All multiemployer plans including joinder agreements, trust documents, annual funding requirements and a current trustee letter (Section 101(k)) regarding partial or full withdrawal liability triggered by or associated with the acquisition. 4 2
Stock Purchase/ Merger In a stock purchase transaction or a merger by operation of law any plans sponsored by Target before the transaction will continue to be sponsored after the transaction. Cost Issues Alternatives Continue Target s plan as a separate plan address coverage/ discrimination issues; assess the cost of sponsoring more than one plan; movement of employees in and out of the plan Merge Target s plan into Buyer s plan Terminate Target s plan consider funding issues (PPA); PBGC issues; potential IRS audit; termination procedures Freeze Target s plan 5 Asset Purchase The Buyer is purchasing some or all of Target s assets and assuming some or all of its liabilities. All benefit plans are left behind unless the Buyer assumes them and becomes the sponsor of the plans. Allow employees to participate in Buyer s plan, if any (becoming less frequent) service credit; benefit accrual Maintain a separate mirror plan for the acquired employees Adopt the Target s plan Target plan spinoff Target plan merger 6 3
Other Issues Control Group Liability Plan Defects/ Correcting Qualification Failures Multiple-employer vs single-employer plans Service Crediting Alternate forms of benefits Treas. Reg. Section 1.411 (d)-6 Roll-Overs PPA allows an eligible roll-over distribution from a qualified plan to be rolled over into a Roth IRA/ Inherited Roth IRAs (non-spousal beneficiaries) Reportable Events Change in contributing sponsor or controlled group Transfer of benefit liabilities Active participant reduction 7 Plan Funding Methods PPA - Beginning in 2008, the PPA eliminated traditional funding methods. The new minimum funding rules are in Sections 412 and 430 of the Code - increase minimum contributions, affect the measurement of plan assets and liabilities, enhanced disclosure regarding the plan s funding status Minimum required contribution Funding target, target normal cost At-Risk plans Requires larger contributions (80% or 70% rule) A Buyer should have an actuary examine the latest actuarial valuation in order to determine the funded status of the plan. 8 4
Multiemployer Plans Sponsored by unions collective bargaining agreement Withdrawal Liability employer has ceased all operations or no longer has an obligation to contribute Stock Sale/Merger if the plan is at the Target level, not a withdrawal event merely because the transaction occurs Asset sale not treated as a withdrawal if certain conditions are met Partial withdrawal 9 Acquisition Agreement Purchase Price Adjustments Representations and Warranties Covenants Buyer agreement to continue benefits Indemnification - Liability issues 10 5
Purchase Price Adjustment Language Within 30 business days after the Closing Date, the actuaries of Buyer and Seller each shall calculate the pension liabilities with respect to each Pension Plan, using the actuarial assumptions, conventions and methodologies agreed upon. The Purchase Price shall be reduced by the Final Pension Plan Purchase Price Adjustment as follows: (i) the Purchase Price payable at the Closing shall be reduced by the Estimated Pension Plan Purchase Price Adjustment; and (ii) upon determination of the Final Pension Plan Purchase Price Adjustment, the Purchase Price shall be reduced or increased. The Final Pension Plan Purchase Price Adjustment shall be equal to the difference as of the Effective Time, between (i) the pension liabilities and (ii) the fair market value of assets held by the Pension Plans. 11 Sample Representations and Warranties List of Documents Made Available: (i) all plans and amendments; (ii) the most recent IRS determination letter; (iii) the three most recently filed IRS Forms 5500; (iv) the three most recent actuarial valuation reports; (v) the summary plan description; and (vi) any insurance policies. Qualification of Defined Benefit Plans All contributions have been made or accrued Statement relating to funding status No prohibited transactions, reportable events or other events that would give rise to liability No claims, legal proceedings or governmental investigation 12 6
Sample Covenants Termination: All "employee pension benefit plans" shall (i) terminate as of the Closing Date and (ii) Target shall make timely distributions. Service Credit: The Buyer shall cause service rendered by employees of the Company to be taken into account for purposes of participation, coverage, vesting and level of benefits (but not for purposes of benefit accruals under any defined benefit pension plan); provided, however, that nothing shall result in the duplication of any benefits. Liabilities: Seller shall retain all liabilities and obligations arising from or relating to all of the Employee Benefit Plans. Effective prior to the Closing Date, Seller (Parent Entity) will assume sponsorship of the Pension Plans, their related trusts, and all liabilities and obligations arising under and related to the Pension Plans. Spin-Off: Subject to the transfer of assets and liabilities, Buyer agrees to provide pension benefits for Transferred Employees. 13 Non-Qualified Deferred Compensation Plans Enactment of Section 409A, generally effective beginning January 1, 2005 The PPA amends Section 409A of the Code to prohibit any employer from setting aside or transferring assets for the purpose of paying deferred compensation of an applicable covered employee under a nonqualified deferred compensation plan during a restricted period with respect to a qualified defined benefit plan. 14 7