If you heard that your company was involved in a merger or acquisition and you work in human resources, would you and your colleagues know how to proceed? Would you know how best to perform the necessary “due diligence” for the other company? When companies merge, HR personnel need to take into account the impact of this event on each business’s numerous financial and cultural considerations.
Companies can offer numerous benefits to their employees, such as medical, dental, vision and retirement plans. But how do the benefits compare to those of the company being acquired? For instance, many companies provide additional benefits to executives, including equity-based and incentive-based compensation packages, supplemental retirement plans, retiree medical benefits and severance benefits upon a change in control due to a merger or acquisition. Also, the non-financial aspects of a merger or acquisition should not be overlooked, such as the organizational structures, the HR technologies and the corporate culture of the various companies.
One important aspect during a merger or acquisition is to understand the target company’s key benefit offerings and to ensure they are in compliance with all applicable IRS and Department of Labor rules and regulations. For example, if the target company offers a defined benefit pension plan, the company should (1) be able to provide the plan document that governs the terms of the plan along with a favorable determination letter from the IRS, (2) provide proof that all required federal filings (such as Form 5500 and PBGC premium filings) have been timely completed, and (3) if there is a plan that offers supplemental benefits to certain executives, show that those benefits are in compliance with IRC Section 409A.
Regarding the financial aspect of the pension plan, a qualified actuary should review several different reports to ensure that reasonable assumptions and methods were used when determining results for (1) the cash contributions required to be made to the plan, (2) the plan liabilities and assets reported on the company’s balance sheet, (3) the annual pension expense recorded in the Statement of Earnings and (4) any projections of future cash contributions, liabilities or plan assets.
Other important items that warrant a very detailed review are the equity components of compensation for the target’s executives. In many instances, when a merger or acquisition and a change in control (CIC) occurs, the vesting provisions of equity programs are accelerated and payments are triggered, which can result in an unexpected requirement of significant cash payments. Additionally, upon a CIC, certain severance benefits (golden parachute payments) may also be triggered for certain key executives and managers (referred to as “disqualified individuals”). Not all companies are aware of Internal Revenue Code Section 280G, which is a federal tax provision that applies a limiting threshold to the amount of the golden parachute payment. If the payment to the disqualified individual exceeds this threshold, the 280G rules will be triggered and a 20% excise tax under Section 4999 would be imposed on that individual in addition to any income taxes, and the company responsible for making the payment cannot claim a deduction for such payment.
Upon a transaction with the intent to merge the two companies, many HR integration issues can arise. For instance, it is very likely that employer-provided benefits differ between the two companies. A key post-merger decision is what benefits package to offer -- continuing two separate benefits packages, providing the more generous of the two plans to all employees, or providing an entirely new benefits package. Additionally, the corporate culture of the two companies may be different, which can create recruiting and/or retaining complications. Inevitably, there will be duplication of jobs and roles after the merger that could result in a force reduction. This can lead to unexpected severance costs if not anticipated during the merger or acquisition process.
Along with the HR concerns of a merger or acquisition, there are tax issues to consider as well.
The first thing that the payroll department needs to find out is how the transaction is being handled. There can be different payroll reporting requirements, depending on the type of transaction planned. For instance, will the transaction be a merger?
In a merger, there are different ways to report the employees depending on the type of merger. Certain mergers require the transferred employees to receive one set of W-2s at the end of the year, while in other mergers, the transferred employees have an option of receiving one or two sets of W-2s. Also, depending on the type of merger, there can be special handling requirements for the quarterly payroll returns to notify the IRS of the transaction.
Another question for payroll is determining whether the transaction is an asset acquisition or a stock acquisition. In an asset acquisition, any acquired employees must move from the predecessor’s Federal Employer Identification Number (FEIN) to a new FEIN. In a stock acquisition, the acquired employees don’t have to move from one FEIN to another.
Whenever there is a movement of employees, whether through a merger or acquisition, there are state payroll issues to consider as well. A payroll department must look at the state footprint of each entity to see if the successor employer is registered in the same states as the predecessor. Generally the payroll department needs to notify each state of the transaction. The payroll department needs to determine if the transfer of state unemployment experience rates are optional or mandatory. If optional, is there a tax benefit to the transfer of experience rate? A transfer of experience rate can either cost or save a company on unemployment expenses over several years.
Many employers insist that during a merger or acquisition, any acquired employees are treated as newly hired employees by the successor. In this situation, the employer subjects the newly hired employee’s wages as taxable for Social Security, FUTA and state unemployment insurance. This can result in the duplication of taxable wages and related employment taxes. In many, if not most, mergers or acquisitions, the transaction qualifies for successor employer status. Being declared a successor employer can result in significant federal and state employment tax savings.
The above items highlight several major issues that need to be reviewed and considered during a merger or acquisition, but there are many more. If the transaction is not well strategized through all stages of the process, results could be disastrous, or at the very least much more time-consuming and costly than they should have been. The success of such a transaction involves not only identifying key issues and tasks, but implementing and executing the strategy to handle those tasks. Each of these tasks requires a special area of expertise. To successfully execute and accomplish the established goals, the individuals or the firm entrusted to perform such detailed analyses and diligence should be well-versed and experienced in all relevant areas.
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