Avoiding Single-Employer Treatment for Portfolio Company Benefits

[NonQualified]

I'm working with a company that buys and sells companies across various industries. It owns 80%+ of each portfolio company, so they’re all part of a controlled group. Right now, each portfolio company maintains its own benefit plans. So far, they’re passing non-discrimination testing (on a plan-by-plan basis), but the company is looking for a better long-term solution. Any ideas on how to structure these benefit plans across the portfolio companies in a way that avoids triggering single-employer treatment? QSLOBs seem like the best solution, but imperfect as QSLOBs will not always align with the corporate structure. 

[Paul I]

It sounds as if the portfolio companies that the company buys and sells can have very different demographics and very different benefit plans.  In an environment like this, the approach the company may want to take is to put in place a due diligence action plan of steps taken before an acquisition to assess how a target's benefit plans could impact the other plans of the portfolio companies.

At a very, very high level, the action plan would assess how the acquisition could impact post-transition period 410(b) coverage testing across all of the plans in the company.  Assuming there is no impact (everybody continues to pass), then the action plan would assess if the target's plans could pass 401(a)(4) nondiscrimination either on its own or possibly when aggregated with another plan among the portfolio companies.

I agree that QSLOBs likely are not the better solution in most cases, but they would always remain available as an alternative.

The challenge to executing the action plan is having current testing data across all of the portfolio plans.  Another challenge is getting testing from a target company before the transaction closes. 

A benefit to executing the action plan is being able to negotiate and inform the terms of the acquisition on topics such as if and when it makes sense to terminate or freeze the target's plans.

Notably, the action plan likely will reveal if the target's plans have any potential compliance issues that could expose the company to an expensive cost of correction.

Again, this is at a very, very high level.  I have seen many times where due diligence before closing has avoided a major disaster, and I also have seen many times where not doing due diligence before closing has led to a major disaster.

[Peter Gulia]

IF a goal is causing a portfolio company to be not a part of the same employer as others of the portfolio companies, the investment partnership might—by or before the expiration of the § 410(b)(6)(C) transition period—sell all or some interests in the portfolio company so it is no longer in the same § 414(b)-(c)-(m)-(n)-(o) employer as others.

[Artie M]

They should look at the Sun Capital cases.. can they fit within those limited non- trades or businesses?  Otherwise, they might be able to use an investment from a parallel "fund" or another unrelated minority investor (which could include management rollovers). 

[Peter Gulia]

As Artie M alludes to, often an investment-holding entity is designed and managed so it is not a trade or business, and so is not a part of the same employer as the entity’s investee.

But if an investment entity has big-enough ownership interests in two or more operating companies, some of those operating portfolio companies might be one § 414(b)-(c)-(m)-(n)-(o) employer.

Yet, those who arrange nonpublic investments often set the interests and relationships in ways designed to avoid common-control groups and affiliated-service groups even regarding investees.