Group benefits issues during mergers and acquisitions

For the buyer, a merger and acquisition (M&A) may have many advantages. They include, but are not limited to, accelerating growth to a critical mass and achieving the resulting economies of scale (e.g., stronger profit margins); accessing and penetrating a market previously underserved by the buyer; complementing its existing workforce with unique skills that would otherwise require time and resources to develop; and avoiding research and development costs by acquiring an enhanced technology or process. However, there are several considerations for the buyer with respect to employee group benefits (i.e., coverage for loss of life, income replacement and reimbursement of health and dental expenses) within an M&A.

Although the financial aspects of group benefits plans may not seem material compared to the overall cost of the acquisition, there can be significant hidden commitments, in terms of current or future benefits costs, that will immediately become the buyer’s responsibility. For example, does the seller have financial obligations (e.g., plan deficit, unfunded reserves) that will now transfer to the buyer? Were these obligations identified and considered when the terms of the purchase were constructed?

Critically, there may be goodwill dividends forfeited among the employees and their dependents if the merging of organizational cultures creates a wide benefits gap between “winners” and “losers.” How can the buyer determine the cost associated with possible employee disengagement during a transition period? And what additional cost must be incurred to mitigate those risks?

Attrition and decreased productivity can affect financial results. Goodwill dividends may not appear as a line item in any financial statement, but, ultimately, they do have an associated value or cost. To understand the potential benefits- related risks, plan sponsors need to think in 3D: dollars, design and delivery.

One of the often-expected outcomes of an acquisition is the reduction of overall operating costs for the new organization—perhaps not immediately, but presumably after a reasonable period of time. This expectation of reduced unit cost should also theoretically extend to the administrative expenses to operate a larger benefits program with greater critical mass, but it may not be that straightforward.

The new organization can achieve efficiency in its benefits plan in two main ways: harmonizing the benefits plans into a single design or consolidating the administration with a single provider. Generally, economy can be achieved only if a single insurer provides each category of protection for all employees in the new organization. And even when one insurer serves all employees, the cost of maintaining two legacy plans may quickly erode the savings.

Other direct-dollar obligations include any promises made for future coverage or protection—usually for retirees or disabled employees who move from the seller to the buyer when the acquisition transaction is completed. These promises may have a present value that the buyer did not expect but that the buyer must still recognize. Or perhaps the growth of that obligation’s cost over time may become a legitimate financial concern unless it is addressed now.

There are also many financial arrangements within group benefits programs today that place a responsibility on the plan sponsor for the cost of claims run-off in the event of contract termination. In other words, if the claims are financed on a “pay-as-you-go” basis while the contract is in force, once the policy is terminated, any claims incurred before the termination date must still be accepted even though they are adjudicated after the program’s termination date.

The buyer can mitigate this exposure by using a number of different strategies, but it’s an exposure that the buyer—depending on the terms of the purchase agreement— usually acknowledges and assumes.

In order to reduce the administrative and underwriting costs of maintaining two legacy plans, plan sponsors are generally advised to have all members in the new combined workforce served and supported by one insurer. However, there may be good reasons to delay this consolidation. For instance, if the seller’s benefits contract provisions can’t be replicated by the buyer’s provider—and if the seller’s specific coverage is critical to retaining a group of employees with unique skills essential to the organization’s success— then it may be necessary to continue those terms separately. Or, if collective agreements negotiated by the seller but transferred to the buyer contain specific reference to benefits levels or configurations, they may not be changed without a thoughtful process.

Setting aside these two caveats, the most prevalent approaches to aligning benefits following an acquisition are to move all employees into the buyer’s plan over a reasonable period of time (especially if the buyer’s workforce is significantly larger) or to create a new plan framework for all employees in the new combined organization. This second option often takes the form of a flexible benefits plan arrangement, allowing all employees in the new organization to select coverage aligned with their current circumstances.

A reasonable period of time, in the context of simply moving everyone into the buyer’s existing plan, may be defined in many ways:

  • the next time the seller’s rates are scheduled to change (i.e., increase);
  • the start of the buyer’s next rate guarantee or policy period;
  • the point at which employees from the two prior organizations begin moving to a common physical location; or
  • as soon as possible following the resolution of other, more immediate business processes or functions.

Regardless, the terms of the purchase should always be reviewed for any guarantee periods or other provisions that may limit plan design options. If the decision is made to move all employees into the buyer’s plan, be sure that there are no policy limitations (e.g., pre-existing conditions or restrictions) that may apply and possibly jeopardize immediate and complete coverage for the transferees. The second approach (i.e., a new plan design) can provide an opportunity to address the winners/losers gap, whether real or perceived. It also offers a chance to address any pain points within the buyer’s plan design. This does not necessarily have to translate to additional cost; it can actually be the time to introduce strategies or design elements to manage aggregate expenditures and ensure the benefits plan’s sustainability.


How the benefits plan is communicated and delivered to members can be just as important as the details of the plan itself. For example, was the seller’s benefits culture based on self-service, mobile apps and accessibility versus the buyer’s more paternalistic environment? The acquisition may offer an opportunity to begin creating a new culture that embraces the features of the two prior organizations that best support the new organization’s business objectives.

It is also worth considering who will champion the benefits program in the new organization, recognizing that some of the former resources or expertise may be lost during the merger. It’s important to identify ownership for benefits as early as possible within the transaction.

Although group benefits considerations embedded in an M&A may not, at first, seem material compared with the overall acquisition cost, they can represent risks or exposures that will translate into significant costs for the buyer if they’re not considered within the framework of the purchase agreement. In fact, some obligations embedded in a benefits plan may not manifest themselves for months or years into the future—long after the M&A has been completed.

Ultimately, ensuring a smooth benefits transition can be one of the most important considerations for the buyer. Benefits are one of employees’ many connections to the employer—and to the workplace—so the positive impact of not messing them up can be long-lasting.


Here are a few more tips to manage benefits issues during an M&A.


  • Refresh your benefits strategy to define the rules of the road and provide a road map for mitigating risk and capitalizing on opportunities.
  • Exercise caution with respect to unfunded or partially funded liabilities (e.g., long-term disability provided on an administrative services only basis).
  • Identify missing or incomplete documentation (e.g., beneficiary records) that may have to be recreated so that the buyer is compliant.
  • Address benefits-related provisions that have not kept pace with legislation or general industry changes.
  • Determine if some coverage may not be available in today’s environment except from the seller’s incumbent provider.


  • Lose sight of other programs and perks (e.g., tuition assistance), as these offerings can also be important to employers.
  • Assume the seller has properly catalogued benefits-related materials. Scan every file for clues, as many abbreviated terms have multiple meanings.

Rick Holinshead is a senior partner with Mercer.

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