Form 5500s with Mergers and Acquisitions

Every day we receive scores of questions on how to prepare health and welfare Form 5500s. Which two questions were asked the most so far in this first quarter of 2022? They are:

• My client has been acquired by another company. How do we line up their next Form 5500?
• My client acquired a new company. Do we just add their benefits to the client’s Form 5500?

To know the answer, each acquisition needs to be carefully reviewed to see how the details line up. We have a checklist to help point out the reference material to use to help determine the next steps. Be ready to roll up your sleeves and have the ERISA attorney on speed-dial, because acquisitions create a very slippery slope.

One Key Note to Point Out:

• The date of the acquisition does not necessarily determine how to proceed with the benefits. You need to follow the plan documents, the carrier contracts’ policy periods, and the acquisition documents to see how benefits are to be lined up.

Checklist for Reviewing

With any merger and acquisition situation, the following are good to review:

• Acquisition Agreement
  • To see if any direction was given on how the benefit plan was to be handled.
  • To note who is responsible for the Form 5500 and other liability obligations.

• Wrap Plan Documents of Each ERISA Plan of the company acquired, the acquiring company, and any plan documents for going forward (it’s very rare to have those already prepared for going forward but it’s good practice to check)
  • Questions to ask:
    • What is the ERISA plan year for each document?
    • Are there any to be on a short plan year? This is very common as employees move from one plan to another.

• Previous Form 5500s for the acquired company(s)
  • Check to see if the Form 5500 filing obligation is resolved for all entities, especially those where the ERISA plan is terminated

• Census or Billing
  • See how many enrolled participants of the acquired company there are, and which ones were migrated to the new company’s benefits when the reporting threshold of 100+ enrolled participants was reached.

• Listing of all benefits of the acquired company (include the voluntary benefits)
  • Were any terminated? If yes, when?
  • Were any of those benefits self-insured with potential run-out claims?
  • Were any benefits funded through a trust?

After you pull these documents together, map out how the plans originated, what needs to be done for the current year, and what will be needed going forward. Below is an example of how to map out:

Past Filings to Prepare
Corp Name – Plan Administrator	EIN	Last 5500	Plan Year	Plan #/ Benefits
ABC Co.	123456789	2019	11/1/2019-10/31/2020	501- Ancillary
XYZ Co	224466889	2020	1/1-12/31/20	504 -Medical
XYZ Co	224466889	2016 -4R (under 100)	1/1-12/31/16	503 – Dental

 

Current Filings to Prepare
Corp Name – Plan Administrator/EIN	Plan # / Plan Year	Due	5500 Filing Notes
ABC Co. /123456789	501 – 11/1/2020-10/31/21	5/31/2022	As is
ABC Co. /123456789	501 -11/1/2021-12/31/21	7/31/2022	Short Plan year and final
XYZ / 224466889	504 -1/1/2021-12/31/2021	7/31/2022	Final
XYZ / 224466889	503- 1/1/2021-12/31/2021	7/31/2022	Final

 

2022 Filing
Corp Name – Plan Administrator/EIN	Plan #/ Plan Year	Due	5500 Filing Notes
ABC-XYZ, Inc/998877665	501 – 1/1/2022-12/31/2022	7/31/2023	First filing; all benefits line up under this Plan

 

Q&A

1. ABC Company acquired XYZ Company on 10/1/2019. ABC Co. has a calendar year plan. Do the XYZ participants automatically get included on ABC’s Form 5500 for the 2019 Form 5500?

Answer: Not necessarily. There are factors to consider first. If the benefits for the XYZ were moved and bundled within ABC Company’s ERISA Plan then you would. However, if XYZ maintained its benefits separately, then they would not be included.

2. The acquisition date is 4/1/2020. Do we file a short and final Form 5500 report through 3/312020?

Answer:  Not necessarily. There are factors to consider first:

• Is the participant count zero at 3/31/20? Were all benefits termed on 3/31/20 or moved to be under the acquiring company’s ERISA plan through updated plan documents? If the answer is no to either, there may not be a final report.
• Were there self-funded benefits? If yes, be sure to consider when all claims were paid out. This may have the final report delayed for a few months for the claim lag.
• If the plan assets were held in a trust, are there still plan assets? The Form 5500 report will need to be filed until the ending assets are $0. Also, if this was a large group, an IQPA report is needed. If it is omitted the penalty fee can reach $50,000.

3. Our client was acquired and most of its policies were termed, except the medical which will stay active. The new owner will be the plan sponsor. Do we have a file a final report?

Answer: There are choices. Since the policy was not termed, the ERISA plan with just the medical can be carried forward. On page 1 of the Form 5500, the new plan sponsor and its EIN will be listed. On page 2 under #4, the old plan sponsor and its EIN will be listed. This is more common than to terminate and start a new plan with the active policy. A determining factor is how the plan documents/SPDs are prepared. They are the road map for the Form 5500. NOTE: Please be careful not to create a Form 5500 filing situation where the same plane number and EIN are used on separate Form 5500s.  It may be necessary to change the plan number when changing the plan sponsor name and EIN.

4. The new owners took over the acquired company’s benefits in 2020. Do you list the old plan sponsor name and address or the new plan sponsor on the 2019 Form 5500? Who signs the 2019 Form 5500? The CFO from the acquired company has since retired.

Answer: See previous blog piece on this from 2019

5. The company acquired did not file the required previous Form 5500 and as a result, has delinquent filings. Since the company no longer exists, can those missed filings be ignored?

Answer: No, the best practice is to have closure. The new company should prepare and e-file the missing filings through the DFVC program, especially if part of the acquisition was to acquire the liabilities of the company. These liabilities could include the Form 5500. If the DOL decides to audit, the new company may face significant penalties which could be the following:

• For non-filers: A penalty of $300 per day, up to $30,000 per year, may be assessed on a plan administrator until a complete Form 5500 is filed.
• For late-filers: A penalty of $50 per day, for each day an annual report is filed after the date on which the annual report was required to be filed, without regard to any extensions of time for filing.

6. Our client was only 50% acquired by ABC Co. and still retains 50% ownership. However, our clients’ benefits were terminated and now shares the benefits of ABC. How does this affect the Form 5500?

Answer: Combining groups is attractive for some since large group rates are typically lower than small group rates. However, this can create compliance complications. When benefits are shared but groups remain unrelated and not under common control (see definitions below), a MEWA can inadvertently form. Compliance requirements may be required such as filing a Form M1 with the DOL (registering the MEWA with the DOL every March 1^st). Also, the Form 5500 needs a list of the participating employers.

Definitions of Common Control:

If common control is established, the box for a single employer can be checked on the Form 5500. The following IRS codes are applied to determine common control:

IRC 414(b): A controlled group of corporations

IRC 414(c): Two or more trades or businesses

• In the case of a parent-subsidiary group: The entities are connected through at least an 80% ownership interest.
• In the case of a brother-sister group:
  • Five or fewer persons own at least an 80% interest in each entity.
  • The same five or fewer persons together own a greater than 50% interest in each entity, taking into account the ownership of each person only to the extent such ownership is identical with respect to each organization.

IRC 414(m): An Affiliated Service Group

• Exists wherever several organizations regularly collaborate in the services they provide to the public (typically integrated services) and the organizations are linked by a material level of cross-ownership.
• Although the Form 5500 applies 414(m) for common control, the DOL noted the following:
  • Accordingly, the “affiliated service group” status under section 414(m) of the code would not, in and of itself, support a conclusion that a group of two or more trades or businesses would be a single employer for purposes of section 3(40) of ERISA. Source: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/information-letters/05-24-2004

Feel free to contact Ann McAdam, Project Manager, at amcadam@wrangle5500.com for follow-up questions or if you need to discuss your client’s situation.