There are many different types of mergers and acquisitions (M&A) transactions, making it very important to understand the overall deal structure and process. Andrew C. Liazos presented “Mergers and Acquisitions Webinar Series Part 2: The Due Diligence Process” for the CLE Program as part of the ABA Joint Committee on Employee Benefits and the American College of Employee Benefits Counsel. He discussed the overall architecture of a deal, including the parties involved, what drives the deal structure, where to get data, price negotiations and more. The presentation focused on specific M&A areas including pension, other retirement and executive benefits.
There are numerous reasons why organizations exempt from taxation under Internal Revenue Code Section 501(c) (3), as amended (the “Code” and, such organizations, “Tax-Exempt Entities”) may offer severance payments to employees who incur involuntary terminations of employment. For example, severance that is conditioned on the departing employee’s execution of a release of claims in favor of the Tax-Exempt Entity can reduce the likelihood of costly and burdensome litigation. Similarly, payment of severance may reduce the risk of negative publicity for the Tax-Exempt Entity by diminishing resentment felt by departing employees. Severance may also help retain existing employees by providing them with a measure of economic security that can dissuade them from seeking alternative employment, particularly if they suspect that the Tax-Exempt Entity has encountered budgetary shortfalls and may be implementing near-term workforce reductions. For these and other reasons, many Tax-Exempt Entities have either implemented or are considering implementing severance programs. Tax-Exempt Entities should be aware of unique opportunities and recent IRS regulations that impact the design of severance programs. This article discusses key decisions and planning opportunities for Tax-Exempt Entities to consider when designing and implementing severance plans and individual severance arrangements. Tax-Exempt Entities face a number of legal and regulatory challenges in establishing severance arrangements, particularly with respect to executive-level severance, as discussed in more detail in Part I. Part II discusses the legal parameters around using Code Section 403(b) retirement savings plans to offer severance to employees with lower levels of compensation.
In many transactions, particularly those where the buyer is a portfolio company of a private equity fund, the buyer agrees to cause its 401(k) plan to accept a transfer of assets from the seller’s 401(k) plan. The asset transfer from the seller’s plan provides the buyer’s with an asset base with which to negotiate the best possible administrative fee structure, and seamlessly transfers the retirement plan benefits of employees being retained or hired by the buyer. If the seller’s plan contains employer stock as an investment however, the buyer should be aware of fiduciary concerns that may arise under the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
“Stock-drop” litigation is a well-known phenomenon centering on plan fiduciary liability to plan participants when the value of employer stock investments in a retirement plan drops significantly. Less well-known is the fiduciary liability exposure facing new 401(k) plan sponsors and fiduciaries accepting a transfer of assets from the seller’s plan that includes former employer stock. Holding a significant block of a single security that is not company stock implicates ERISA prudence and diversification issues, and must be closely monitored.
Fiduciaries of 401(k) plans considering accepting asset transfers of former employer stock have often been advised to engage counsel to evaluate the prudence of holding the former employer stock in the buyer’s plan as an investment alternative (even if “frozen” to new investment) and establish a timeline for requiring that plan participants divest the former employer stock within one to two years of the asset transfer from the seller’s plan.
In light of the decision in Tatum v RJR Pension Inv. Comm., 2014 U.S. App. LEXIS 14924 (4th Cir. Aug. 4, 2014), buyer 401(k) plan sponsors and plan fiduciaries must now be even more careful to engage in a process that separates fiduciary from non-fiduciary acts and carefully follows established procedures for implementing any required divestitures of former employer stock. In Tatum, the plan was not properly amended to require the divestiture of former employer stock. This failure to properly amend the plan converted a plan design decision, which was a non-fiduciary or “settlor” decision, into a fiduciary act. In Tatum, the plan fiduciaries also failed to follow a prudent process for determining whether or not to eliminate former employer stock and for determining the timeline for implementing such divestitures.
The Tatum decision highlights that, in addition to fiduciary risk in holding former employer stock in the buyer’s 401(k) plan as an investment, there is also fiduciary risk in the process of eliminating former employer stock as an investment in the buyer’s plan.
When establishing a new 401(k) plan, the buyer should consult with legal counsel regarding the risks involved in accepting an asset transfer from a seller’s plan that includes former employer stock. Any new plan sponsors or plan fiduciaries that are contemplating accepting former employer stock as part of an asset transfer should consider whether or not they should engage an independent third party to monitor the former employer stock fund and/or conduct an investigation into the prudence of eliminating the former employer stock. In addition, new plan sponsors should ensure that any third-party administrators or prototype providers have adequately discussed with the plan sponsor the feasibility of having the elimination of the former employer stock part of the plan document as a plan design decision. Given the fiduciary risk for both continuing to allow the former employer stock as an investment alternative, and of implementing any decision to eliminate the former employer stock fund, buyers may now determine that the fiduciary risks of accepting a transfer outweigh the benefits of better administrative pricing and easier employee transition.
On February 2, 2015, the White House released its Fiscal Year 2016 Budget, which includes a number of tax reforms targeting retirement savings. The provisions, if enacted as presented, would have a significant effect on current retirement-related tax incentives.
The United States Department of Labor (DOL) recently issued guidance that gives administrators of defined contribution plans a one-time opportunity to reset their deadline for providing participants with the plan’s required annual fee disclosure.
Under DOL final regulations issued in 2010, administrators of 401(k) plans and other defined contribution plans with participant-directed investments must provide participants and beneficiaries with an annual fee disclosure that includes detailed plan and investment-related information (see “Department of Labor Issues New Rules on 401(k) Fee Disclosure to Participants” for more information). For most plans, including calendar year plans, the initial fee disclosure was due by August 30, 2012, with subsequent disclosures to be provided at least once in any 12-month period.
Plan administrators and other interested parties expressed concern that because the annual August 30 deadline does not coincide with the timing for other participant disclosures, it is not feasible to combine the distribution of the annual fee disclosure with other participant materials, thus requiring a separate mailing and associated costs. Also, some believed that the disclosure would be more effective when distributed with other plan communications or at a more relevant time, such as during enrollment periods.
In response to these concerns, the DOL issued Field Assistance Bulletin (FAB) 2013-02, which provides plan administrators with a one-time opportunity to reset the deadline for the annual fee disclosure if the plan administrator determines that doing so will benefit plan participants and beneficiaries. Under this guidance, a plan administrator will be treated as satisfying the annual notice requirement by furnishing the 2013 disclosure no later than 18 months following the date of the initial disclosure, after which the 12-month period would apply. For example, if the initial disclosure was furnished on August 25, 2012, the 2013 disclosure would be due no later than February 25, 2014. If a plan administrator chose to furnish the 2013 disclosure on December 20, 2013, then the 2014 disclosure would be due no later than December 20, 2014.
In addition, for those plan administrators who have already taken steps and incurred costs to furnish the 2013 disclosure, the one-time reset opportunity may instead be applied to the 2014 disclosure. For example, if a plan administrator has already worked on the 2013 disclosure and it is furnished on August 25, 2013, the 2014 disclosure would be due no later than February 25, 2015, and then the 12-month period would apply beginning with the 2015 disclosure.
FAB 2013-02 is welcome guidance for plan administrators who wish to distribute the annual fee disclosure with other participant materials or at a different time of the year. Although this guidance does not address concerns that plan administrators must satisfy a fixed annual deadline for the disclosure, the DOL indicated that it is considering further revising the timing requirement to permit a disclosure window (for example, distribution within a 30-45 day period) in future years.
On October 14, 2010, the U.S. Department of Labor (DOL) issued final regulations that require enhanced fee disclosures to participants in 401(k) plans and other defined contribution plans subject to the Employee Retirement Income Security Act (ERISA) with participant-directed investments. The DOL believes that participants previously did not have sufficient information to make informed investment decisions, and believes these new requirements provide enhanced and necessary investment information to participants. The new regulations are effective on January 1, 2012, for plans with a calendar year plan year.
The new regulations require disclosure of two major categories of information: “plan-related information” and “investment-related information. Some of these mandatory disclosures were previously included in ERISA 404(c) regulations. However, compliance with ERISA 404(c) regulations is voluntary, and thus, not all participants have previously received the information required under this new guidance.
Implementation of these new disclosure rules will require significant effort from plan administrators and plan service providers. Plan administrators should familiarize themselves with these new disclosure regulations and start working with service providers and investment issuers to ensure a smooth transition.
For more information on the timing of the new disclosures and the types of information that are considered plan-related information and investment-related information click here.