Mergers and acquisitions may create a slippery slope for Form 5500s. As a result, Wrangle receives many questions in this area each week. Below, are a series of questions and answers that have crossed our desks. In addition, since mergers may inadvertently form multiple employers (MEWAs), the definitions of common control (needed to keep a group as a single employer) are also provided.
Sidebar: Each merger and acquisition situation is unique and may require that an ERISA attorney review all aspects of compliance to ensure no ugly compliance surprises.
General Guidelines to Follow:
With any merger and acquisition situation, there are some key elements to always check.
- Review the ERISA Plan Documents for all entities involved.
- What direction do they provide?
- Do they need to be updated or amended?
- Did all benefits of the acquired company terminate?
- Were any of those benefits self-insured with potential run-out claims?
- Were any benefits funded through a trust?
- Check that the Form 5500 filing obligation is resolved for all entities, especially those where the ERISA Plan is terminated.
- Review the acquisition and merger documents.
- Who has responsibility for the 5500 and other liability obligations?
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 5500 for the 2019 Form 5500?
Answer: Not necessarily. There are factors that need to be considered 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, they would not be included.
2. The acquisition date is 4/1/2020. Do we file a short and final 5500 report through 3/31/2020?
Answer: Not necessarily. There are again factors to consider.
- 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 Docs? If the answer is no to either there may not be a final report.
- Were there self-funded benefits? Is 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 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 termed, except the medical which will stay active. The new owner will be the Plan Sponsor. Do we have to 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 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 fairly 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 5500. NOTE: Please be careful to not create a 5500 filing situation where the same plane number and EIN are used on separate 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 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 5500 and as a result has delinquent filings. Since the company no longer exists, can those missed filings be ignored?
Answer: No. 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’s. How does this affect the 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. New compliance requirements may be required such as filing a Form M1 with the DOL (registering the MEWA with the DOL every March 1st) and the Form 5500 needs a list of the participating employers.
Definitions of Common Control:
If common control is established, the box for single employer can be checked on the 5500. The following IRS codes are applied to determine common control.
IRC 414(b): Controlled group of corporations
IRC 414(c): Two or more trades or business
- In the case of a parent-subsidiary group, the entities are connected through at least an 80 percent ownership interest
- In the case of a brother-sister group: (a) five or fewer persons own at least an 80 percent interest in each entity, and (b) the same five or fewer persons together own a greater than 50 percent 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 several organizations are linked by a material level of cross-ownership.
Although the 5500 applies 414(m) for common control, the DOL noted the following:
Accordingly, “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.
Feel free to contact Ann McAdam, Technical Consultant for follow up questions or if you need to discuss your client’s situation. She can be reached at firstname.lastname@example.org.