Bryan, Pendleton, Swats & McAllister, llc
September/October 2015Developments
Recent Developments in employee Benefits
It was 1997. I was a recent college graduate with a shiny, new finance degree, eager to crunch numbers. So, I was thrilled when I was assigned to assist with the nondiscrimination testing for one of our largest and most complicated 401(k) plans. I met with the project leader, and she gave me my assignment—to review and clean up the data validation report for the plan. It was long, and the errors were numerous. There were
people whose birth dates were after their hire dates, whose compensation was less than their 401(k) deferrals, or who had been reported under three or four different Social Security numbers. It was not how I imagined putting my college degree to work. Anxious to stop trudging through volumes of data problems, I asked the project leader, “Why does it matter?” Sure, I could see that the data was obviously wrong, but being new to the industry, I didn’t know why we cared.
Over the years, I’ve had that same question come back to me many times— usually from overworked benefit
managers who would rather focus on the problems of today and the potential
problems of tomorrow—not the problems from yesterday. The answer is that data affects every aspect of retirement plan administration starting with enrolling participants timely to making sure contributions are correct; paying benefits correctly and at the appropriate time; keeping the plan compliant with laws, regulations, and the plan document; and budgeting various costs. The list of reasons why data matters is endless.
The familiar phrase, “garbage in, garbage out,” takes on new meaning when the garbage out could mean that
retirees are struggling to make ends meet because a data error caused their retirement benefits to be calculated incorrectly. Or discovering that a compensation error caused benefits to be miscalculated and, as a result, all of the nondiscrimination testing is skewed. Or learning that a data problem caused a larger than expected pension plan liability that must be reflected on the
accounting statements.
Employers typically send thousands of pieces of participant data to their service providers. A tiny error here; a little mistake there; if the data isn’t perfect, does it really matter?
Yes, it does. Each data item affects the plan, and there are risks if the data is wrong. Plans are unique, and while all organizations are at risk of reporting bad data, certain organizational
characteristics increase that risk. First, size matters—the more employees a company has, the greater the likelihood it will experience data problems that affect plan administration. Next, complexity matters—the more the benefit provisions of the plan vary for different employee groups, the more grandfathered or carve-out benefits there are, the greater the potential for a data error to create mistakes. And of course, employment practices matter—organizations with decentralized hiring managers, many rehires, or frequent employee transfers,
Also in this issue:
IRS Announces 2016 Annual Limits– 5
Considering a Merger or Acquisition? Consider This – 6
The M&A Checklist – 10
BPS&M Pension Liability Index – 10
Data: the Building Blocks of an
Efficient Retirement Plan
are more likely to experience data problems. The following paragraphs highlight the most common errors and the problems they cause.
Birth dates
Birth dates are often entered incorrectly, but having the right birth date is essential to determining many plan factors such as plan eligibility, retirement income projections, and even contribution levels.
Age is often a factor in eligibility to participate. Not allowing an employee the opportunity to defer on time is an operational error that is corrected by the sponsor making contributions to the plan for matching
contributions that the employee could have received had he or she started deferring at the correct time. In some cases, the employer may also have to contribute a qualified nonelective contribution (QNEC) for missed deferrals. Additionally, the employer must fund earnings on those contributions from the time that the participant became eligible to defer until the correction is made.
Birth dates are often entered incorrectly,
but having the right birth date is
essential to determining many plan
factors . . .
Birth date is an important data element for plans that use age-based target date funds as its default investment option. Participants who are invested in an incorrect target date fund due to a birth date error may expect the employer to make up missed earnings during the time that they were invested in the wrong fund.
Age affects retirement income projections. This is critical for helping participants with their retirement planning and determining whether they are on track or off track to meet their financial goals. Retirement income projections are also important for determining pension plan liabilities and, if a defined contribution plan relies on cross-testing, to satisfy its nondiscrimination requirements.
For some plans, age may be a determining factor in the level of contribution that is due to participants. Age is also a determining factor for when participants can receive distributions from a retirement plan.
Employment dates
Hire dates, termination dates, rehire dates, and leaves of absence start and return dates play an important role in administering retirement plans correctly. It may seem
like tracking an individual’s employment status would not be that difficult, however, it is the single biggest struggle that organizations face with participant data. This is especially true if data is entered from
decentralized sources, if the organization has a high volume of rehires, or if employees frequently transfer or rehire from one division of the organization to another.
Plans with automatic enrollment and
automatic deferral increase features are
especially difficult to administer if the
employment dates are not reliable.
Many plans have a service requirement that must be achieved before becoming eligible to participate in the plan. Depending on a plan’s provisions, the service period may be counted as elapsed time, may require that a certain number of hours are worked, and may have special rules about bridging service if an employee hires and rehires within a certain amount of time. This can be difficult to track when the data is good; it is impossible to administer correctly if dates are missing. As with birth dates, if an employee doesn’t enter the plan timely because of employment date issues, the required corrections can be costly to an employer.
Plans with automatic enrollment and automatic deferral increase features are especially difficult to administer if the employment dates are not reliable. For plans that have a Qualified Automatic Contribution Arrangement (QACA), there are specific requirements about how the automatic deferral applies to rehired employees. If the data is not good, it’s impossible to comply with these QACA requirements, which again opens the employer up to corrective action.
Employers often have difficulty reporting accurate employment dates when an employee has transferred from one division to another or when an employee terminates from one division and is rehired by another division. If the recordkeeper receives a term date but no hire or transfer date, the transferred employee will look like a terminated employee. The recordkeeper will notify the employee that, due to this termination, he or she can take a distribution from the plan. For the employee who receives such a notice, emotions can run the gamut from anger to elation. The employee may be confused by the erroneous notice, anxious about “losing” his or her job, or looking forward to receiving a distribution—a distribution that the employee is not actually eligible to 2 Bryan, Pendleton, Swats & McAllister / September-October 2015
take. At best, the employee is unhappy. At worst, the plan has experienced an operational error.
Another typical problem when transferred employees appear to be terminated is that deferral elections are stopped. Once the error is realized, the employer will be required to fund missed employer contributions and, in some cases, may have to contribute a QNEC to make up for missed employee contributions.
Loan administration and deemed distribution of delinquent loans is another complicated area of plan administration. In order to do the job right, it’s important to have accurate employment dates. For example, a participant may be entitled to have his or her loan reamortized upon return from a leave of absence. However, if the leave wasn’t reported to the recordkeeper, the loan may be deemed distributed prior to the return from leave.
Finally, accurate employment dates are essential to calculate years of service correctly, which may be used in calculating contributions and vesting for some plans. If the dates are not correct, the benefits due a
participant will not be correct.
Compensation
If a client challenged me to find something wrong with its plan, this is where I would start looking. The multiple regulations that govern compensation for plan purposes are detailed and difficult for a layperson to understand. Different definitions of compensation may be used for different purposes under the plan. Rules apply to when post-severance pay is counted and when it is not. Layer on top of that organizational structures that separate benefits and payroll teams and the way compensation practices can change over time, and it can be hard to get compensation right.
For purposes of calculating plan contributions, look to the plan document to determine what pay is included or excluded. A plan can use any reasonable definition of pay for this purpose, and the definition of pay can vary for different contribution types. For example, a plan may allow 401(k) deferrals to be made from all wages but calculate matching contributions on base pay (excluding overtime and bonuses). If applicable pay is incorrectly set up in payroll or incorrectly reported to the
recordkeeper, deferrals and employer contributions may be incorrectly calculated.
For purposes of satisfying the annual additions test and determining highly compensated employees (HCEs), the plan must use compensation defined under Section 415 of the Internal Revenue Code (IRC). There are three main definitions: 415(c) / current includible compensation,
6051 / W-2 compensation, and 3401(a) / wages for federal withholding purposes. Section 415 compensation is often referred to as gross compensation, but that is misleading. Each of these definitions specifically includes and excludes certain items of compensation and electively includes or excludes certain other items of compensation. Most plans never come close to reaching the annual additions limit; therefore, the biggest concern if this pay is incorrectly reported is that the HCEs may be incorrectly determined. This can affect
nondiscrimination test results. It can also affect the benefits to which an employee is entitled. For example, some plans impose a lower deferral limit on HCEs than they do for nonhighly compensated employees.
The multiple regulations that govern
compensation . . . are detailed and
difficult for a layperson to understand.
For purposes of satisfying nondiscrimination testing, the plan must use a safe harbor definition of pay as defined by 414(s) of the IRC. Compensation defined under Section 415 of the IRC satisfies this definition; however, there may be additional inclusions or exclusions. If this pay is not correctly accumulated and reported, the nondiscrimination results may be invalid, and refunds or corrective contributions may be incorrectly calculated. Plans may report annualized compensation or base pay for use in retirement income projections to help
employees determine whether their retirement savings are on track. If this information is not correct,
individuals may select an improper savings rate with the expectation that doing so will help them accumulate enough retirement income.
In addition to understanding what pay items are required for each purpose under the plan, it is essential to
understand how your payroll system works and is set up. What pay codes does your organization use and how do they correlate with the various compensation definitions used by the plan? Does your payroll system aggregate compensation at a pay group or W-2 reporting level? What happens if someone transfers and is paid by two different pay groups during the year? Is all compensation for an individual being reported to the plan’s service providers?
Hours
Hours may not be required data for all plans; however, many plans require participants to accrue a certain number of hours for plan eligibility, vesting, or benefit
accrual. Depending on the plan, the hours required to be used may be actual hours or equivalent hours.
Identity errors arise when the same
employee is reported as multiple
people or when different individuals are
reported as the same person.
Errors in hours usually arise in defining which hours are required to be reported. Generally speaking, the required hours are the hours for which an employee is paid or entitled to be paid. Overtime hours are counted as the actual hours worked, not 1.5 times the actual hours worked. Paid vacation time is not included in hours worked, but it is time for which an employee is entitled to be paid, so should be counted.
Identity
Identity errors arise when the same employee is reported as multiple people or when different individuals are reported as the same person.
In the first case, what usually happens is that an employee is hired under one Social Security number. Later, it is discovered that the Social Security number is incorrect, and a new record is created for that person. The accounts for this person need to be merged with the recordkeeper, and close attention must be paid to whether the new record is reporting the full information for the employee or just information from the date on which the change was entered. In the second case, the same Social Security number or employee ID is assigned to different people. This creates a situation in which the contributions for both employees may be assigned to a single account to which only one employee has access.
Best practices for managing plan data
Implementing the following best practices can help you control your data and reduce or eliminate the resulting administrative problems.
Update. The file interface is often set up upon conversion to a new recordkeeper or service provider. Over time, changes in plan provisions, pay practices, and the way HRIS and payroll systems track data can invalidate that file interface. You should review file specifications periodically to ensure that changes are being captured and reported correctly on the interface files.
Validate. Make data validation a regular activity for your plan. Data validation may include comparing plan data against payroll data to ensure that each system has picked up the expected data. Validation also involves screening for suspicious data. The best validations don’t just look at individual data fields; they compare current data elements with data from prior reporting periods. For example, you may not notice that a participant was dropped from a file unless you compared it to a prior file or that compensation is incorrect unless you see that the change from one period to another is unreasonable or that hours are being reported for an individual who received no compensation. The frequency and methods of validations should be appropriate for the size and complexity of the plan. Some plans may be fine with an annual validation. Other plans need to validate data with each payroll.
Automate. Data validation can be cumbersome. To the extent that validation criteria can be automated inside payroll and HRIS systems, the easier it will be for you to manage data and minimize errors. For example,
generating an error message from the HRIS system if the current date is entered as a new employee’s birth date will prevent one common error from ever occurring. Some organizations prevent errors by engaging their payroll providers to validate certain data as it is being written onto the interface file. Others may engage their service provider to screen the interface files for errors prior to sending data to their recordkeepers.
Enumerate. Manual processes are prone to errors. List and thoroughly document all manual processes. Once you have identified manual processes, you should develop written procedures so that processes are completed uniformly and steps are less likely to be missed. Additionally, identify ways to audit manual processes, so that any errors made can be corrected. By knowing where and how a break-down is likely to occur, you have a leg up on preventing the potential error. Investigate. Sometimes it can seem like you have spent all your available time just finding the correct answers to data questions. However, investing a little more time to find the cause of the problem can pay big dividends. Knowing the cause of a problem is the first step in finding a solution and freeing yourself from researching and fixing the same problem over and over again. Finding the cause of a problem and implementing processes to prevent future errors provides a safeguard in the event of a regulatory audit. Regulators expect that when you find problems, you also find ways to prevent them in the future.
In perspective
The data items noted above are the most common items that affect administration across all retirement plans; however, any criterion that drives eligibility, benefit accruals, or benefit payments should be carefully considered and screened for errors.
. . . ensuring that valid data is reported
is one of the most important things a
plan sponsor can do to live up to its
fiduciary duty.
Because data is fundamental to every part of plan
administration, ensuring that valid data is reported is one of the most important things a plan sponsor can do to live up to its fiduciary duty. As complicated as this sounds, ensuring good data on the front end creates far fewer headaches than having to correct data-created problems on the back end. For more information about finding and correcting data errors, contact your BPS&M consultant.
Jeaninne M. Irwin, QPA, CEBS, Principal
Jeaninne leads defined contribution consulting services and specialized benefits reporting and analytics services for BPS&M. Jeaninne is skilled in the design and implementation of custom
solutions for retirement plans and specializes in plan design, plan corrections, data management services, and compliance testing.
Jeaninne received her MBA from Western Kentucky University and her BBA with a Finance concentration from Austin Peay State University. Jeaninne has attained the designation of Qualified Pension Administrator from the American Society of Pension Professionals and Actuaries, and the designation of Certified Employee Benefits Specialist from the International Foundation of Employee Benefit Plans. She is a member of the American Society of Pension Professionals and Actuaries and the International Society of Certified Employee Benefits Specialists. Jeaninne is a consulting principal in our Nashville, TN office.
Annual Limits for 2016
some of the more common limits recently announced by the iRs and ssA are shown in the following table.
2015 limit
2016 Limit
Annual limit on 401(k) and 403(b) elective deferrals
Code § 402(g)(1)
$ 18,000
(unchanged)
$18,000
Annual limit on 457 deferrals
Code § 457(e)(15)
18,000
(unchanged)
18,000
Annual limit on catch-up contributions to 401(k), 403(b), and 457 eligible
governmental plans for employees age 50 or older
Code § 414(v)(2)(B)(i)
6,000
6,000
(unchanged)
Annual limit on annual additions to defined contribution plans
Code § 415(c)(1)(A)
53,000
(unchanged)
53,000
Annual limit on benefits payable from defined benefit plans
code § 415(b)(1)(A)
210,000
(unchanged)
210,000
Annual limit on compensation considered for certain plan purposes
Code §§ 401(a)(17) and 404(l)
265,000
(unchanged)
265,000
Highly compensated employees
Code § 414(q)(1)(B)
120,000
(unchanged)
120,000
social security — maximum taxable earnings
• Social Security (OASDI only)
118,500
118,500
(unchanged)
• Medicare (HI only)
no limit
No limit
6 Bryan, Pendleton, Swats & McAllister / September-October 2015
In recent months, we’ve heard endless stories about high-profile mergers and acquisitions (M&A). Some, like the proposed Comcast megamerger with Time Warner Cable, never made it past the Federal Communications Commission’s regulatory approval: other potential M&As, like Verizon-AOL, Yahoo-Foursquare, and Amazon-Yelp, will keep the term M&A in the news and on the tips of our tongues for some time to come.
M&As are many things: they are exciting, glamorous, and often controversial; they can provide economies of scale and broaden market shares; they can increase capabilities and capacity; they can enhance bottom lines and expand global reach. They are also a lot of work. This article is a brief overview of a number of
workforce and employee benefits issues buyers and sellers should consider—with the aid of legal counsel—when undertaking a merger or acquisition.
Know what you’re buying
M&As can take one of two forms, an asset purchase or a
stock purchase. Both types of transactions require due
diligence on the part of the buyer; however, the type of transaction will determine the extent of the process. In an asset purchase, the buyer purchases specific assets and liabilities of the target entity from the seller,1
while the seller retains equity ownership of the business. Only assets, liabilities, and associated contracts
specifically identified in the purchase agreement are transferred to the buyer. Typically, employees associated with the acquired assets will terminate their employment with the target and be hired by the buyer. Retaining key employees post-acquisition may be of particular concern to the buyer. All of the other assets and liabilities remain with the seller.
In a stock purchase, the buyer acquires the assets, liabilities, and contracts of the target entity. The target
company’s employees will not terminate their employment, and unless a benefit plan is terminated prior to the transaction’s closing, the target’s benefit plans will continue under the buyer. Due diligence is especially important in order to identify the types of employee benefit plans the target company maintains, to ensure that those plans are in compliance with their terms, and applicable law, and to discover potential
issues that may arise.
Any problems that exist within the target's benefit plans prior to closing the deal will become the buyer’s problems once the deal is closed. The same is true of certain protected benefit plan provisions. For example, a profit sharing plan that is a transferee
plan (i.e., the plan holds assets
that were transferred from a pension plan) cannot be
amended to remove the qualified joint and survivor annuity form of payment with respect to the transferred assets.
In a stock purchase . . . Any problems
that exist within the target's benefit
plans prior to closing the deal will
become the buyer’s problems once the
deal is closed.
The buyer and seller will negotiate any benefit-related liabilities that are to remain with the seller. As part of the sale, the seller may agree to indemnify the buyer for any liabilities incurred prior to the transaction’s closing. The operations of the target entity continue without interruption, and the seller has no continuing interest in the target’s operations. Whether, and in what form, a benefits plan is continued after the transaction closes depends largely on what is discovered during the due diligence process. The target’s employee benefit plans
Considering a Merger or Acquisition?
Consider This
could be terminated, merged into the buyer’s plans, or continued intact.
What could possibly go wrong?
To say employee benefits plans are complex is an understatement. With the Internal Revenue Code, ERISA, and the myriad of other federal and state regulations that govern benefit plans, the day-to-day operations can be a challenge. Add in a merger or acquisition transaction, and buyers and sellers both have to stay on their toes to ensure nothing goes awry.
Changes in benefits, especially
healthcare, affect employees and their
families at a personal level.
So what could possibly go wrong? A lot; let’s look at two not uncommon examples.
Example 1: The defined benefit plan’s most recent Schedule B indicates that the plan is fully funded; however, an unrealistic interest rate assumption or a significant change in asset values could mean that a plan that was fully funded a year ago is currently underfunded.
Result: A funding liability and the inability to terminate the plan.
Example 2: The buyer plans to enroll the target’s employees in its medical plan midyear. What are the differences between comparable target and buyer plans? Will target employees pay more for their coverage? Will they be able to carry any deductible and out-of-pocket costs over to the buyer’s plan? Do the plans use different networks, and if so, will employees still have access to their established providers?
Result: Changes in benefits, especially healthcare, affect employees and their families at a personal level. In addition to the monetary cost of restarting deductibles and out-of-pockets midyear, there is an emotional cost if they also have to change providers. The buyer should consider such changes carefully; a poorly considered decision will negatively affect employee morale. In addition to the added administrative tasks faced by HR, the buyer’s newly acquired employees will be (understandably) unhappy. Some may have to pay surrender charges on investments, and in many cases, participants will have less money than was initially distributed to them.
The need for due diligence
A study by CFO Research Services found that senior finance executives tend to undervalue the role Human Resources (HR) plays in an M&A transaction, and only 20% thought that HR’s involvement in the due diligence process would have led to better outcomes.2
So it should come as no surprise that organizations (both buyers and sellers) put workforce issues, such as employee benefits, pay, and employee morale, near the bottom of the M&A “to do” list.
Such thinking can be costly. HR’s employee benefits knowledge and input are particularly important in a stock purchase transaction, since any liabilities attached to the target’s benefit plans and compensation policies will become the buyer’s liabilities. These liabilities can be significant and are often long-term.
HR’s employee benefits knowledge and
input are particularly important in a
stock purchase transaction, since any
liabilities attached to the target’s benefit
plans and compensation policies will
become the buyer’s liabilities.
During the due diligence process, the buyer will review the target’s business operations, including the target’s employee benefits plans. This is the buyer’s chance to discover and correct or avoid issues related to the target’s benefits plans. Due diligence is the buyer’s opportunity to:
• Identify the types of benefit plans the target provides • Determine the liabilities associated with specific
benefit plans
• Determine the cost of proving those benefit plans • Uncover compliance issues within plans
• Decide the fate of the various benefit plans
This last point is important, because the buyer will need to determine well before the transaction closes whether to terminate a plan prior to acquisition, merge the plan into its own comparable plan, add the target’s plan to its benefits program, or create a new plan that incorporates the best features of all existing plans. The knowledge and skills needed to successfully accomplish this often go beyond the expertise of the typical HR department, and it is highly recommended that the buyer hire qualified legal
counsel and other advisors to assist in the decision-making process and the ultimate design of the surviving benefits program.
Essential information
Due to the regulatory complexity and the workforce issues that can arise during a merger or acquisition, it is wise for both the buyer and the seller to involve HR in the early stages of the transaction. Generally, the time period between the transaction’s initiation and close is short, and the buyer has limited time to request, receive, and review information related to the various benefits plans. Creating a checklist of essential information up front will make the process more efficient.
Generally, the time period between the
transaction’s initiation and close is
short, and the buyer has limited time to
request, receive, and review information
related to the various benefits plans.
Information should be requested from the seller as well as the trustees and TPAs involved in the administration of the target’s benefits plans. Information from trustees and TPAs should be checked against information provided by the target to insure accuracy and
completeness. Follow-up information is often necessary, and if the information requested is not forthcoming, the buyer should be prepared to repeat its request until the information is received. This is especially true if the information will aid in the identification of plan defects and the accurate assessment of plan liabilities that will be assumed as a result of the transaction.
When the seller is unable (or unwilling) to provide essential information, a complete compliance review of benefit programs cannot be performed. In such cases, the buyer should exercise caution, as this may indicate problems with the plan. The missing information should be noted along with any potential problems that could arise. The buyer uses the knowledge gained through the due diligence process to assess liabilities and future costs. Based on the findings, the buyer and seller will negotiate the acquisition agreement with assistance from their respective legal counsel.
The acquisition agreement
The financial risks associated with the target’s employee benefits plans and compensation practices may seem
small compared to the overall cost of the acquisition; however, they do affect the price the buyer is willing to pay for the target, and they should be reflected in the acquisition agreement.
An important part of the acquisition agreement is the seller’s representations and warranties, which are backed by the promise to indemnify losses incurred by the buyer if those representations and warranties prove to be faulty. The parties will negotiate the types and amount of damages that will be indemnified. Indemnification may be subject to baskets (no indemnification is made until a threshold is reached),
deductibles (only amounts over the threshold are paid), and caps (limits the total amount of the indemnification liability).
In the realm of HR, employee benefits, and
compensation, the buyer will require the seller to make representations and warranties with respect to the qualification of its plans, operations of the target’s employee benefits plans, and HR practices. The buyer may also ask for a representation regarding its ability to terminate or amend benefits plans and that such an activity will not trigger an additional liability.
Supporting your most valuable resource
Changes, whether positive or negative, can affect employee morale and productivity. For many employees, whether employed by the target or the buyer, concerns about jobs, benefits, and career paths will be top of mind. The most effective way of managing those concerns and minimizing speculation and rumors is through early, open, and frequent communication.
For many employees, whether employed
by the target or the buyer, concerns
about jobs, benefits, and career paths
will be top of mind.
It is essential that organizations fold their
communications strategy into their integration planning. This is the point where detailed decisions about
organizational changes and the future of benefits plans are made. Information that is provided to employees flows from these decisions. While there will be any number of hurdles to overcome before the M&A transaction can close, once it’s announced, both the buyer and the target need to communicate with their employees.
On the benefits front, employees will be
particularly concerned about the future
of their medical and retirement benefits.
Begin by letting employees know why the merger is taking place. This is the time to set expectations, so be clear about what the organizations hope to gain from the merger. Employees will want to know what changes will be made: will jobs be eliminated, will entire facilities be closed, or will it be business as usual?
On the benefits front, employees will be particularly concerned about the future of their medical and
retirement benefits. Employees in the target group need to know what will happen to their benefits. Will their current health benefits continue or will need to enroll in a new plan? Will their retirement plan merge with the buyers plan, or will they be eligible for a distribution? Will they be able to continue voluntary benefits on an individual basis? What will happen to their accrued vacation and sick time? Employees with 401(k) loans should receive a separate letter with details about their loan balance, whether the loan will be transferred to the buyer’s plan, and if not, repayment options and procedures, the time period before the loan will be in default, and the tax implications in the event of a default.
In perspective
M&As can provide significant financial advantages but they also take a great amount of work. Bringing your HR professionals into the due diligence process early, including them in integration planning, and providing them with the information they need to effectively communicate with
employees won’t guarantee that an M&A transaction is a success, but numerous studies show that not doing these things will almost certainly guarantee that it isn’t. The checklist on the following page may be helpful as you work with your legal counsel and other advisors to determine what information to request as part of your due dilligence.
1 Note that the target is the entity that is being purchased. The target and the
seller can be, but are not necessarily, the same entity.
2 CFO Magazine, “Debating HR’s Role in Deal-Making,” October 1, 2010.
http://ww2.cfo.com/banking-capital-markets/2010/10/debating-hrs-role-in-deal-making/
Katherine Tange-duPré, CEBS
Kathie, has more than 25 years of experience in the writing, design, and production of effective employee communications. She has won gold, silver, and bronze awards for BPS&M
from the International Association of Business Communicators. She has published articles in the “Journal of Commerce and Industry,” Healthline,
“American Society of Healthcare Risk Management,” and has worked with organizations in the United States and abroad in England, Australia, South Africa, and
Singapore. She also taught professional practices and graphic design courses at Watkins College of Art, Design & Film. Kathie earned a B.A. in Finance from Sam Houston State University, a B.F.A. in graphic design from Watkins College of Art, Design & Film, and an MBA. She is a Fellow of the International Society of Certified Employee Benefit Specialists and a member of the International Association of Business Communicators, the Middle Tennessee Employee Benefits Council, and AIGA, the professional association for graphic design. Kathie is a consultant in our Nashville, TN office.
CONSULTANTS
in the
LIMELIGHT
Ken Hohman (Bps&m louisville) spoke at a session titled “the profession’s Responsibility to the public” at the society of Actuaries Annual meeting in Austin, tX on october 12, 2015. Ken also represented the American Academy of Actuaries as a guest of the
Actuarial Association of europe’s fall meeting, which was held september 24–25, 2015 in Bucharest, Romania.
For more information about our consultants, please visit www.bpsm.com.
Ken Hohman
Bryan, Pendleton, Swats & McAllister, llc
Recent Developments in employee Benefits
eDevelopments
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The BPS&M Pension Liability Index
Updated as of September 30, 2015
by Jeffrey Thornton, ASA, EA, MAAA
Interest rates are arguably the primary driver of the volatility in pension plan liabilities. BPS&M has established a set of liabilities and applied the yield curves to those liabilities in order to create the indices used to demonstrate the effect of interest rates on plan liabilities. The BPS&M Pension Liability Index tracks the percentage change in liabilities for a typical defined benefit plan under the following four interest rate standards, which are in general use:
1. The Full Yield Curve published by the IRS for minimum funding purposes under IRS Code §430.
2. The 24-month Averaged Yield Curve published by the IRS for minimum funding purposes under IRS Code §430. 3. The Adjusted Average Yield Curve reflects the impact
of the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA). HATFA extended the funding relief, which was introduced by MAP-21 in 2012. Originally, under MAP-21, the funding relief began to diminish in 2013. HATFA extends the funding relief, such that it does not begin to diminish until 2018.
10 Bryan, Pendleton, Swats & McAllister / September-October 2015 Bryan, Pendleton, Swats & McAllister / September-October 2015 11
The M&A Checklist
Buyers should consult with their legal counsel to insure that they request sufficient information to adequately complete the due diligence process. the following are just a few examples of some of the benefit and compensation information that the buyer may request: • A list of all employee benefits,
including those related to operations outside of the U.s., all plan
documents, adoption agreements, amendments, contracts, trust agreements, administrative forms, forms 5500 and all schedules, audit reports, and actuarial report, if applicable; iRs determination letters (for qualified retirement plans), investment committee meeting minutes, policies, and procedures • The names of plan oversight and
investment committee members • The names and positions of individuals
who perform day-to-day tasks for the various benefits plans, and internal controls and procedures for those tasks • The basis for recording benefit costs
and liabilities
• Employee communication materials including spDs, smms, sARs,
enrollment materials, blackout notices, HipAA notices, coBRA election materials, and other information provided to employees
• Employee handbooks, manuals, policies, programs, practices, and job descriptions
• A list of any unresolved benefits-related complaints that have been filed with local, state, or federal agencies • Union activity, work stoppages, strikes,
collective bargaining agreements (including side letters or letters of understanding), participation in any multiemployer pension plan, and if so, has there has been an assessment of withdrawal liability
• A summary of any labor disputes and their outcomes
• Details of individual contracts and employment agreements (both written and oral), management incentives, bonus plans, stock options, retention and severance agreements, deferred compensation arrangements, unfunded liabilities, and change of control agreements that could trigger golden parachute rules
• If the target sponsors a defined benefit plan: pension trust agreement, actuarial reports, investment policy, interest and investment assumptions, and plan costs including administrative costs, employer contributions,
benefit distributions, and employee contributions (when applicable) • A list of COBRA qualified beneficiaries,
their qualifying event date, election date, and premium payment information • Copies of agreements relating to
rabbi trusts or other arrangements established to secure the payment of deferred compensation or severance • Post-retirement benefits and their
associated liabilities prepared in accordance with fAsB
• A schedule of workers' compensation claims
• Information about contract labor, employment agencies, and temporary employees
• A list of outsourced services and any professional or administrative service agreements with respect to benefit plans
4. A Corporate Financial Yield Curve used for financial statement pension liability determinations. Prior to January 1, 2014, this was measured using the
Citigroup Pension Discount Curve. It is now measured using the Wells Fargo Pension Discount Curve (AA-rated or higher). For more information about the Wells Fargo Pension Discount Curve, please read the article titled “Introducing the Wells Fargo Pension Discount Curves” in the Jan/Feb 2014 issue of Developments. The BPS&M Pension Liability Index uses a hypothetical plan for benchmarking purposes based on “typical” pension plan features. The duration of the liabilities under this hypothetical plan is 15 years. The benchmark period for the Index starts with the effective date of the Pension Protection Act (January 2008), and the graph shows the rise and fall in liabilities due to changes in interest rates relative to that date. All other factors remain constant throughout the benchmarking period; ergo, the change in liabilities is due solely to the interest rate environment.
The trends demonstrated in the graph will generally hold true for most pension plans, but the magnitude of the percentage changes will vary depending on a given plan’s demographics and benefit accrual patterns.
The Indices Changes table shows the percentage changes in the indices over various periods.
The BPS&M Pension Liability Index is updated regularly. If you have questions or comments concerning the BPS&M Pension Liability Index, please contact your BPS&M consultant or [email protected]. Jeffrey Thornton, ASA, EA, MAAA
Jeff has 10 years of actuarial experience in defined benefit plan administration. He specializes in liability studies and has provided plan-specific analyses for clients of
various sizes and diverse industries. Jeff is a consulting actuary in our Louisville, KY office.
Full Yield Curve Average Yield Curve Corporate Financial
Yield Curve Adjusted Average Yield Curve (HATFA)
80 90 100 110 120 130 140 150 160 15-Sep 15-Jan 14-Jan 13-Jan 12-Jan 11-Jan 10-Jan 09-Jan 08-Jan 128.3% 130.3% 135.4% 96.4%
BPS&M Pension Liability Index since inception
Indices Changes
Indices Since Inception (1/1/08) 2015 Year toDate last 12 months
full yield curve +30.3% -5.0% -1.4% Averaged yield curve +28.3% +2.0% +1.5% Adjusted Average yield curve -3.6% 0.0% +2.7% corporate financial yield curve +35.4% -4.0% +1.1%
About BPS&M
Bryan, Pendleton, Swats & McAllister, LLC has been providing actuarial and benefit consulting services to clients since 1971.
Jackson
Suite 266 Highland Village, 4500 I–55 N, Jackson, Mississippi 39211, 601.981.2155Louisville
11807 Brinley Avenue, suite 101, louisville, Kentucky 40243, 502.244.7828Nashville
5301 virginia Way, suite 400, Brentwood, tennessee 37027, 615.665.1640Richmond
9020 Stony Point Parkway, Suite 200, Richmond, Virginia 23235, 804.267.3200 contact us via email at [email protected]Developments is furnished by Bryan, pendleton, swats & mcAllister, llc (Bps&m), a Wells fargo company, to provide general information about recent developments and current
topics in employee benefits. The information provided is a summary and should not be relied upon in lieu of the full text of a particular law, regulation, notice, opinion, legislative proposal or other pertinent information, and the advice of your legal counsel. Bps&m does not practice law or accounting, and this publication is not legal or tax advice. legal issues concerning your employee benefit plans should be discussed with your legal counsel. This publication is intended for informational purposes only and is in no way intended to offer investment advice or investment recommendations.
© Copyright 2015 • Bryan, Pendleton, Swats & McAllister, LLC (BPS&M) • All rights reserved
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