Deal-Breaking M&A Issues Related to Employee Benefit Plans and Executive Compensation

Employee benefit and executive compensation issues can disrupt merger and acquisition transactions when overlooked until the last minute, or cause major post-transaction problems if not properly addressed before closing. The list below is intended to facilitate the detection, negotiation, and resolution of possible employee benefit plan and executive compensation-related problems. As a general matter, sellers may defuse risks and streamline negotiations through proactive pre-sale planning. On the other hand, buyers may maximize their deal-related protections (and their post-closing alternatives) by assuring early stage attention to the items listed below.

Note that the following list merely illustrates the "ordinary" range of benefit plan issues that may interfere with a change in corporate control (CIC) transaction. Disclosure schedules will often suggest other material issues, such as benefit plan defects and potential liabilities. When distressed or bankrupt companies are involved in a transaction, special attention is critical - both to proactively address existing benefit plans and contractual arrangements and to lay a sound groundwork for the future. Overall, sellers, targets, and buyers should always be represented in these matters by experienced M&A ERISA counsel.


Employment-related Agreements

  • Key employees who have the right to resign with full severance upon a CIC.
  • Key employees who are not subject to post-employment restrictive covenants.
  • Employment-related covenants and agreements that are not assignable to the buyer (or surviving entity).
  • 409A risk assessment - click here to see a 409A diagnostic checklist for employment agreements and releases.

Equity Award Plans

  • Out-of-the-money stock options that the employer cannot unilaterally cancel.
  • Stock options with a below-market exercise price on the grant date (or grants for which there is not a reasonable basis on which to show the exercise price was at or above fair market value).
  • Uncertainty over how equity awards will be handled upon a CIC.
  • Violation of federal and state registration or disclosure requirements.
  • International compliance and tax issues for equity award refinements or substitutions.

Non-qualified Plans

  • Questionable compliance with §409A.
  • Whether plans with material benefits will terminate or continue following the CIC.
  • Whether rabbi trusts will continue, or be formed to provide CIC protections for executives.

Parachute Payments

  • 280G golden parachute penalties (or the failure to assess the golden parachute implications of both the CIC transaction and any associated terminations of employment).
  • Lost accelerated vesting, severance, or other benefits due to 280G limits (or the need to replace them).
  • The need for a shareholder cleansing vote, with associated disclosures and risks.

Life Insurance (COLI)

  • Whether significant corporate-owned life insurance will be continued, terminated, or transferred to the executive (and the terms for transfer).


401(k) and other Defined Contribution Plans

  • Litigation risks from excessive fees paid by the plan and/or the participants, poorly monitored investments, or employer stock investments.
  • Compliance problems in need of correction (how to correct, and by whom), and their impact on a possible plan termination or plan merger.
  • Positioning for plan termination (to avoid post-CIC "orphan plan" risks).
  • Possible partial termination issues if seller had a significant drop in participant count before closing.

NOTE: Target companies and sellers are often best served to terminate their retirement plans and to seek IRS determination letters asap after signing a merger or sale agreement. To do this with a 401(k) plan, action is usually required prior to the closing of the transaction. If the handling of the seller's plan is not addressed until after the closing, the option to terminate and distribute/roll over the account balances will often be gone.

Defined Benefit Plans

  • Underfunding on a current or plan termination basis.
  • Whether the plan will terminate or continue post-CIC.
  • Liability to PBGC if the plan will terminate.

Multiemployer (Union) Plans

  • Contribution increases for "yellow" and "red" zone plans
  • Withdrawal liability for underfunded plans.
  • Bonding and other ERISA 4204 issues related to an asset purchase.
  • Whether plan contributions will continue or terminate post-CIC.


  • Questionable appraisals of employer stock, including the CIC value.
  • Whether the ESOP will terminate or continue post-CIC.
  • Whether an outstanding securities acquisition loan will be discharged or continued.
  • Whether unallocated shares will be released solely to seller's employees.
  • How, and by whom, ESOP shares will be voted in connection with the CIC.
  • Whether an Independent Fiduciary needs to be appointed to handle decision making for the ESOP.


Group Health Plans

  • Self-insured plans without adequate stop-loss coverage (or excessive exposure to uninsured claims).* Whether buyer or seller will be responsible for COBRA obligations.
  • Post-closing coverage of seller's employees
  • Affordable Care Act compliance issues.
  • MEWA prohibitions if plan covers employees of unrelated employers.
  • VEBA issues if plan funded through VEBA.

Retiree Medical

  • Whether the plan is terminable or amendable at will, or provides lifetime benefits.
  • Whether the plan will continue or terminate post-CIC.

Disability and other Welfare Plans

  • Coverage issues.
  • Active at Work Clause often requires employees on leave to stay on old plan until they return to work.

Cafeteria Plans

  • Coverage issues for mid-year transaction.
  • Health and Dependent Care Flexible Spending Accounts. 

Severance Plans

  • Whether a plan is terminable at will, locked-in for some time post-CIC, or triggers significant severance liabilities.
  • Whether it makes sense to adopt, amend, or terminate a plan on a pre-closing basis to control liabilities or to refine plan terms.
Please contact any of the following Wagner Law attorneys (who jointly prepared this alert) for further information about the issues detailed above and our other M&A related services: Israel Goldowitz, Mark Poerio, Roberta Watson and David Gabor.