United States: Underfunded Benefit Plan Issues In M&A Transactions

Given the state of the economy, may companies have employee benefit plans that are currently underfunded.  Underfunded plans can create a significant issue in the event of a sale of the company.  This post explores several potential employee benefit plan issues.

Multi-Employer Benefit Plans.  If a company's employees are unionized, a potential seller must comply with any applicable union requirements contained in the applicable collective bargaining agreement prior to the transaction.  Statutory withdrawal liability penalties can also apply to a multi-employer plan.

Any applicable penalties are assessed immediately after a transaction occurs.  Exceptions may apply depending on the situation, including the company's industry.  For example, special exceptions apply to construction industry companies.

Single-Employer Plans.  If a single-employer pension plan is underfunded, the buyer would take on funding responsibility as a result of the acquisition.  As a result, the seller and buyer will typically negotiate a reduction to the purchase price in order to account for the buyer's assumption of the underfunded pension plan.

The amount and timing of an underfunded pension obligation is a long-term and contingent issue, which makes a purchase price negotiation more difficult.  For example, actual benefits may be lower or higher than estimated or performance of investments may increase or decrease after closing.  Also, a plan may be adequately funded to meet current minimum standards and yet not funded sufficiently to allow immediate termination of the pension plan.

Highly specialized rules apply in analyzing employee benefit plans in the context of a company transaction.  These rules provide limitations that have applied to many companies in recent years.  Given their sensitive nature, parties to a transaction should identify any potential issues early on in the process of negotiating the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.