What happens to employee benefits when one company buys another (2024)

Sales of small businesses have gone “through the roof,” according to a CBS News report released last summer. In many instances, larger businesses are acquiring smaller businesses because it’s the easiest way to obtain skilled and trained workers in the middle of an extremely tight labor market.

The treatment and handling of workers and their employee benefits during a company sale are critical pieces of any successful transition.

There are a multitude of laws, rules and legal documents that govern retirement plans (for example, 401(k), Simplified Employee Pension, Simple IRA, 401(a), defined benefit, nonqualified deferred compensation, Supplemental Executive Retirement Plan, severance) and benefit plans (health insurance, cafeteria, flex, Health Savings Account, Health Reimbursem*nt Arrangement, group life, disability, retiree health) that most small businesses maintain.

Although most businesses use outside third-party administrators, recordkeepers, consultants and investment advisers to assist with their plan maintenance, these advisers may not be fully equipped to give advice on all the legal and business aspects of a transaction related to employee benefits.

How employees’ benefits in a sale/acquisition transaction are handled will depend on whether the transaction is structured as an “asset purchase” or a “stock purchase.”

In an asset purchase, the buyer only acquires certain agreed upon assets and liabilities. Conversely, in a stock purchase, the buyer is obtaining the corporate entity, maintaining the business and stepping into the seller’s shoes with respect to all assets, liabilities, employment relationships, plans and contracts.

Since most small business sales involve asset purchases, let’s focus on some of the employee benefits issues that tend to surface in these transactions:

— If you’re the seller and have at least 75 employees, you may need to comply with the federal or state WARN Act rules, which require advance notice of plant closings or mass layoffs.

— You should understand whether employees who will be laid off by the seller will be rehired by the buyer. The buyer and seller may want to make accommodations for those workers who will become unemployed.

— Consideration must be given to ongoing health plan coverage for laid-off and transferring workers. If the seller is continuing its health plan, it may be required to offer health care continuation (COBRA) to terminating employees. Alternatively, the buyer may wish to bring all transferring employees onto its health coverage on an immediate basis (without the usual waiting period).

— In many instances, the selling business maintains a 401(k) or profit-sharing plan of some type. In an asset purchase, workers are considered “terminated” by the seller. This will trigger a distribution opportunity for the workers under the seller’s 401(k) plan. The buyer may want to facilitate tax-free rollovers from the seller’s plan to its plan. For many employees, the ability to rollover an outstanding participant loan is crucial.

— Most retirement plans contain eligibility requirements for new employees. If a buyer is acquiring experienced or valuable employees in the transaction, it may want to amend its plan to provide for immediate eligibility for this group. Vesting service should also be considered.

— Some small businesses have collectively bargained employees. If the seller participates in a multiemployer (Taft-Hartley) plan, the parties need to consider whether the transaction will trigger “withdrawal liability” under the union’s pension plan. Withdrawal liability can be substantial but can be avoided and transferred to the buyer with proper planning and documentation.

— In many cases, small business owners think they no longer need a retirement plan because they just “cashed out” of their business. However, depending on the seller’s income stream and plans for the future, it may be possible to “shelter” significant amounts of taxable income through the use, or continued use, of certain types of retirement plans. The seller should consider what it will do with its plan(s).

Employee benefits are often an overlooked aspect of sale/acquisition transactions. However, they are critical not only to the success of the transaction but the continuing success of the business after the closing.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency and business clients throughout California. He can be reached at jeff.chang@bbklaw.com.