It is no secret that a business which is owned by a private equity fund will eventually be sold.  As part of the sale process, the potential buyer will examine the employee benefit documents and the plans’ operations to determine if there are any potential risks.  If errors are found, the seller may be required to take costly action to correct the errors prior to closing or the purchase price may be reduced.  There are steps that a CFO or human resources director can take now to help make the future sale process go smoother, including the following:

Establish a Plan Document File

Retirement, 401(k), flexible spending accounts and cafeteria plans are governed by provisions of the Internal Revenue Code.  To obtain tax benefits, a plan must be in writing and formally adopted by the company either by corporate resolution or by the signature of an officer or other authorized person.  Because of the tax rules, the date that the document is adopted is very important.  For example, a company that allows its employees to pay for medical premiums with pre-tax withholdings from the employees’ paycheck must have adopted a section 125/premium payment plan prior to the date the pre-tax withholdings may begin.

Start now by collecting in one place the insurance policies, contracts, adoption agreements and summary plan descriptions for the current benefits.  If you have an amendment, locate the original document that is the subject of the amendment.  Add to the file any annual reports, IRS form 5500 for the plans, and any Affordable Care Act transmittal forms (e.g., IRS form 1094-C and 1095-C as they are filed).  Also include in the file the annual 401(k) testing results.  Finally, if documents are signed electronically make sure you download a copy with evidence of signature.

Review the Employee Handbook and Open Enrollment Materials

Are any benefits mentioned in these communications that are not included in the plan document file? Are the mentioned benefits no longer offered by the company?  Updating the handbook before due diligence starts will save you from needless questions from the buyer.

Be able to Explain the Typical 401(k) Plan Administrative Processes

It is not unusual for buyer’s advisors to ask the following questions:  How quickly are 401(k) salary deferrals transferred from the company’s bank account to the plan’s trustee?  When was the last time that the company discussed fees with its service providers?  Are plan forfeitures being used annually?  What happens to the 401(k) accounts of missing participants?

Having an understanding of the operations of the 401(k) retirement plan will aid you when due diligence begins.

By taking steps now to gather and organize the information that will be needed for the future sale, you will be in a better position to address the numerous questions that will be raised during the due diligence process.  Even if your company is not owned by a private equity fund, the same information is useful to have at your fingertips if your plan is selected for audit by the DOL or IRS, or if the owners of your company decide to sell the business.


About the Author:
Deborah Grace is a Member in Dickinson Wright’s Troy office where she advises business owners, human resources professionals and plan fiduciaries on the complex laws that impact the design and administration of their retirement  and welfare benefit plans.  She has extensive experience advising private equity funds on employee benefits due diligence matters.  She can be reached at 248-433-7217 or and you can visit her bio here.