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Santo Gold

When selling your TPA business

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This is a long way off for us, but when the time comes to see a TPA business, how are terminated plans/clients or plans that moved on to another TPA typically handled?  For example, we have clients that have been gone for 3, 5 even 10 years.  If we were to sell the TPA business, who maintains responsibility for any out-of-the-blue questions or follow ups on those old clients, the new TPA or the one that is selling?  I assume that gets worked into the sales agreement, but in general, does the new TPA take that on?

Thanks

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1 hour ago, Bill Presson said:

Why would you have any responsibility to a client that has been gone for 10 years?

Lets say a plan you used to be the TPA (TPA #1) for goes to another TPA firm (TPA #2) 5 years ago.  You the sold your TPA business 2 years ago to a different firm (TPA #3). That plan now gets audited and it turns out something was done incorrectly with the plan document you drafted for them over 5 years ago and IRS fines and penalties are assessed.  TPA #2 did not draft the document being questioned.  Is TPA #1 still responsible/liable for that old document, or does TPA #3 have that responsibility?  I assume there is language somewhere in the sales agreement about past clients, but I was curious whether that normally transfers old client responsibility to TPA #3 or does it stay with TPA #1.

I suppose TPA #2 could also be responsible for not catching and advising on fixing the error.

 

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58 minutes ago, Santo Gold said:

Lets say a plan you used to be the TPA (TPA #1) for goes to another TPA firm (TPA #2) 5 years ago.  You the sold your TPA business 2 years ago to a different firm (TPA #3). That plan now gets audited and it turns out something was done incorrectly with the plan document you drafted for them over 5 years ago and IRS fines and penalties are assessed.  TPA #2 did not draft the document being questioned.  Is TPA #1 still responsible/liable for that old document, or does TPA #3 have that responsibility?  I assume there is language somewhere in the sales agreement about past clients, but I was curious whether that normally transfers old client responsibility to TPA #3 or does it stay with TPA #1.

I suppose TPA #2 could also be responsible for not catching and advising on fixing the error.

 

Generally those things are covered in the representations and warranties in the acquisition agreement. In almost all cases, the transaction will be asset based and the prior owners will retain all lingering liability. Often the sellers will obtain some kind of tail coverage (much like a physician) to cover ongoing liability. The acquiring firm will have 0 liability assuming they have a decent attorney.

ETA: if it's still a client, TPA #3 will probably have some responsibility to repair the issue, but any excess fines/legal costs generally is deducted from the payout to the sellers.

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3 hours ago, Bill Presson said:

In almost all cases, the transaction will be asset based and the prior owners will retain all lingering liability.

Yep

3 hours ago, Bill Presson said:

Often the sellers will obtain some kind of tail coverage (much like a physician) to cover ongoing liability

Yep.

3 hours ago, Bill Presson said:

The acquiring firm will have 0 liability assuming they have a decent attorney.

Yep

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When you retire, you want to be retired!

1.  We provided buyer with a USB hard drive that had all files & workpapers - everything - for the life of our firm (35+ years).  Whether there's an IRS audit an attorney dealing with an estate trying to determine if someone still has money in a plan, it's all there for the buyer to deal with.

2.  At the advice of both ERISA counsel and our regular attorney we "invested" in a 6 year E&O tail, that also covered first-dollar defense costs.  As I recall the annual tail premium was about half of our normal annual premium.  

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