Length of Time for Acquired Employees to Join Health Plan

[waid10]

Hi. We are acquiring multiple companies. They each have their own H&W benefits. If the employees of the target companies don't join our health plan immediately (but stay on their own health plans), how long can that transition period last? How does that impact nondiscrimination testing? In other words, does the length of the transition period matter when it comes to how the testing is performed?

Thanks for any thoughts.

[Chaz]

Unlike retirement plans, there is no transition period for health and welfare plan nondiscrimination testing purposes.  It poses some difficulties in M&A deals.  There are work-arounds, which are generally only partially satisfactory.  Speak with your benefits counsel.

[waid10]

Just now, Chaz said:

Unlike retirement plans, there is no transition period for health and welfare plan nondiscrimination testing purposes.  It poses some difficulties in M&A deals.  There are work-arounds, which are generally only partially satisfactory.  Speak with your benefits counsel.

Hi Chaz. What do you mean when you say there is no transition period? I thought that the testing would be done at the end of the plan year. So if the target plans stay separate for the whole year, each plan would be tested; but if the target employees join our health plan, say in November, then the testing is different. Correct or no?

[Chaz]

The buyer would need to do the testing as soon as possible after closing (doing it before closing is ideal).  Doing it at the end of the year is highly risky.  Having two separate plans for even a portion of the year risks failing the eligibility portion of the tests.

In my experience, this is not a priority for the IRS, but of course that could change.

[waid10]

21 hours ago, Chaz said:

The buyer would need to do the testing as soon as possible after closing (doing it before closing is ideal).  Doing it at the end of the year is highly risky.  Having two separate plans for even a portion of the year risks failing the eligibility portion of the tests.

In my experience, this is not a priority for the IRS, but of course that could change.

Forgive my questions. I thought that if, the transition to a single plan occurred a few months after the transaction (and passed testing) then that is fine. i.e., there wouldn't be any need to do testing immediately following the transaction when the employees were still on separate plans. Is that true?

[Peter Gulia]

If the seller’s former employees and their beneficiaries are covered by the seller’s health plan after those former employees no longer are the seller’s employees, which person—seller or buyer—pays an employer’s expense, and which gets income tax deductions?

[Luke Bailey]

One data point, waid10, is that when the buyer's new employees continue to be covered under the seller's plan (which is common, assuming the seller sold only part of its business and continues to have a plan) you technically create a MEWA, but the DOL Form M-1 instructions say you don't have to report if does not extend beyond the end of the plan year following the plan year of the acquisition.