In the torrent of details that accompanies a business merger or acquisition, it is easy to overlook “fringe” issues such as employee benefit plans. In many cases the principals, eager to consummate the deal, push off the unification of different benefit plans to a later time. However, this can trigger some unexpected consequences, such as drawing the attention of the IRS.
The IRS has established teams of specialists to conduct employee benefit plan audits, with a particular emphasis on compliance issues that crop up during a merger or acquisition. The IRS wants to be sure the plan sponsors – both pre-merger and post-merger – are properly managing the plan and that employees are being protected. The IRS estimates that it has about 50 benefit plans under audit examination at any given time.
What are they looking for during the benefit plan audits? There are four main “red flags” generated by an M&A situation that can lead to tax penalties or even disqualification of tax-favored employee retirement programs.
- Employer Matching Contributions Made to Employee Accounts – In many (if not most) acquisitions, employees of the company that has been acquired are migrated to the new owner’s retirement plan. This must be done in a timely and seamless manner to ensure all employees are receiving their contributions. In addition, if the acquiring company uses faulty or incomplete data or records, the amount of the contributions made could be incorrect.
- Profit Sharing Allocations Made to Employee Accounts – Similarly, the IRS wants to be sure these payments are being made to the accounts of employees in an acquired company. In some cases there can be delays or omissions due to incompatible payroll systems. You’ll need to resolve any conflicts and make the payment in a timely manner.
- Operation of Merged Plans – When two benefit plans are merged the IRS wants to be certain that the employees of an acquired company (or employees of both companies, if it is a new plan) are able to exercise distribution and loan options that are mandated by law.
- Accrued Contribution Obligations of Acquired Company – When an acquiring company assumes the obligation of the purchased entity to make employee benefit plan contributions, these liabilities must generally be capitalized as part of the cost of the acquired stock or assets. The acquiring company cannot claim tax deductions for these accrued contributions when they are paid in cash.
If issues surrounding employee benefit programs during a merger are not addressed in advance, it can have an adverse effect on both the acquiring company and the employees of the acquired business. Failing to comply with the rules can mean the loss of valuable tax benefits, and the imposition of interest charges and penalties by the IRS. The guidance of a tax advisor with experience in M&A activities can help you remain in compliance and avoid costly mistakes and omissions.
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