When an employer embarks on a merger or acquisition, its executives and employees are affected not only by the obvious changes in their day-to-day tasks but also in more subtle and complex ways concerning certain fringe benefits they may have previously agreed to.
Can pension and health benefits be affected by a corporate reorganization? It would be a mistake to assume that all of an employee’s current and future benefits are carved in stone. Whether a specific employee benefit may be eliminated or “trimmed” depends largely in part on the specific type of benefit as well as what the contracting corporate entities agree to. The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) which generally governs the provision of pension and health benefits may secure a certain level of past benefits; however, future pension and health benefits may be subject to change depending on the terms of the merger agreement. Common merger agreement language regarding employee benefits includes phrases like “at least comparable in the aggregate” or “substantially similar.” Where the surviving entity assumes liability for the disappearing entity’s plans, benefits may continue with the new employer as they were under the old. Unfortunately, this is not always the case as the corporate entities have discretion over the structure of the transaction and the division of the assets and liabilities associated with certain employee benefits.
Executives must assess the impact of corporate reorganizations on executive compensation arrangements: severance, change in control agreements, golden parachutes and the like. In addition, such a corporate change is likely to implicate other types of plans, especially when considering executives. For instance, many executives have some form of severance arrangement in which they will receive payment in the case of an adverse employment action taken as a result of a change in control, such as a merger or acquisition. If the plan involves an ongoing administrative scheme it may be governed by ERISA, and thus the executive’s severance would be protected by, among other things, ERISA’s vesting and disclosure requirements and the fiduciary duties imposed on the employer as plan sponsor. As a threshold inquiry, an executive must assess whether the severance arrangement covering him or her in the case of a merger or acquisition would be covered by ERISA because the manner in which the executive can collect benefits will likely differ depending on the answer. For example, in order to collect benefits due under an ERISA plan, the claimant must generally exhaust administrative remedies under the plan; this may not be required if the plan is not qualified under ERISA.
Many executives also have “golden parachute” provisions that provide for additional severance compensation in cases where his or her company was acquired by a hostile takeover. Relevant considerations for executives with respect to such provisions include a possible 20% excise tax on excess payments (as determined under the Internal Revenue Code) and the potential for a “gross-up” to shift that tax burden to the employer.
Corporate reorganizations may present an opportunity to negotiate a retention bonus. Furthermore, an acquiring employer may offer executives and employees of the acquired employer a retention bonus for not leaving or seeking other work for a specified period of time. Such a bonus rewards employees for staying on during the transition, likely until the position is eliminated, to reduce the impact of the disruption caused by the reorganization. Retention bonus plans are not likely to implicate ERISA, but may do so if lumped together with a severance benefit plan. Therefore it is important for the executive or employee to carefully scrutinize the terms of any offered retention bonus.
Executives and employees undergoing a corporate reorganization need to make themselves informed stakeholders. Considering the frequency of corporate merger and acquisition activity, it is important for employees and executives to assess the large number of benefits they may have available to them before or after such an event takes place. An important inquiry not only involves the general type of benefit offered, but the legal framework that governs those benefits, as the procedure for collecting what is owed under an agreement may be drastically different depending on whether ERISA applies.
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