As part of M&A due diligence we review for plan eligibility errors, one of the IRS’s noted top 10 most common retirement plan errors submitted to its Voluntary Correction Program. According to the IRS, this mistake most often surfaces as a result of a merger or acquisition. In this episode of Speaking Of Benefits, Wendy Gilligan discusses retirement plan eligibility errors and why they are so common in M&A deals.
Transcript
Today we’re talking about retirement plan eligibility mistakes that can surface in M&A deals and why deal attorneys turn to us for both due diligence and post transaction guidance.
An eligibility mistake happens when an employee who should be included in the plan isn’t and an employee who shouldn’t be included is.
Eligibility is number 3 on the IRS list of the top 10 most common retirement plan errors. And, according to the IRS, this mistake most often crops up as a result of a merger or acquisition.
Why are eligibility mistakes so common and why in M&A deals? In the sale of a business, it’s common for two or more companies to become a controlled group.
A controlled group is two or more separate businesses that share common ownership. Under IRS rules, these businesses have to be treated as if they are one company for employee benefits purposes – and that goes for both retirement and healthcare benefits.
So, for example, let’s say Alex owns a manufacturing company with 75 employees who have health and retirement benefits. Alex then buys a shipping company with 25 employees who have no benefits. Alex continues running the companies as separate businesses. She doesn’t realize that the IRS expects her to treat all 100 employees as if they work for one employer – the controlled group that consists of both companies.
The ambitious serial entrepreneurs we work with are almost always shocked to learn that these controlled group rules exist and that they apply to them.
Which is why, in M&A deals especially, our job is to guide business owners and their counsel through these rules. No one wants to be on any IRS top 10 list.
If you need specific guidance on this topic, let’s start a conversation.
Speaking of benefits, this is Wendy Gilligan.
This podcast is for general informational purposes only. It does not create an attorney-client relationship between Employee Benefits Law Group and the listener or reader and does not constitute legal advice for a specific situation.
