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Mergers and acquisitions create numerous compliance challenges, with Affordable Care Act (ACA) requirements ranking among the most complex. Beyond standard benefits integration, M&A activities trigger specific ACA employer mandate considerations that require careful navigation. Proper due diligence in this area can prevent significant penalties, unexpected costs, and administrative headaches during workforce integration.
Determining Post-Transaction ALE Status
One of the first considerations during M&A due diligence is how the transaction will affect Applicable Large Employer (ALE) status. An employer with fewer than 50 full-time equivalent employees may suddenly find itself subject to the employer mandate following an acquisition.
The IRS provides specific guidance for determining ALE status after a merger or acquisition. In general, if an ALE acquires another organization, the combined entity remains an ALE at least through the end of the calendar year. If two non-ALEs merge and the combined workforce exceeds the 50 FTE threshold, ALE status typically begins in the month following the transaction close date.
For transitions that occur mid-year, organizations should review whether they have enough time to implement compliant coverage offerings before penalties might apply. The IRS offers limited transition relief in some M&A scenarios, but this cannot be assumed without careful analysis.
Evaluating Compliance History and Exposure
During due diligence, thoroughly examine the target company's ACA compliance history, including:
- Previous IRS penalty assessments (Letter 226J) and their resolution
- Historically offered health plans and their affordability/minimum value status
- Coverage offer documentation for full-time employees
- Forms 1094-C and 1095-C for the past three years
- Any pending appeals or unresolved compliance issues
Look specifically for indicators of potential liability that could transfer with the acquisition, such as:
- High numbers of Marketplace subsidy recipients among the workforce
- Missing or inadequate documentation of coverage offers
- Inconsistent application of measurement periods for variable-hour employees
- Affordability percentages that operated close to threshold limits
If compliance issues are identified, consider negotiating specific indemnifications or purchase price adjustments to account for potential penalty exposure.
Analyzing Measurement Methods and Periods
Many compliance challenges arise from differences in how merging organizations determine full-time status under the ACA. When one organization uses the monthly measurement method and another uses the look-back measurement method, harmonization requires careful planning.
During due diligence, document both organizations' approaches to:
- Measurement periods (length and start/end dates)
- Administrative periods
- Stability periods
- Treatment of different employee classifications
- Special unpaid leave and employment break periods
After closing, the acquiring company generally has two options: maintain separate measurement methods until the next plan year or transition everyone to a unified method. Each approach has compliance implications that should be evaluated during pre-transaction planning.
Assessing Coverage Offerings and Plan Designs
Compare health plan offerings between the organizations, with particular attention to:
- Minimum value status of each plan
- Affordability calculations and safe harbors used
- Waiting periods for new hires
- Eligibility rules for various employee classifications
- Contribution strategies that impact affordability
If the target company's coverage fails to meet ACA standards, model the financial impact of extending compliant coverage to the acquired workforce. This analysis should inform integration timelines and budgeting.
Workforce Classification Review
Examine how each organization classifies its workforce, looking for:
- Documentation supporting full-time/part-time designations
- Treatment of variable-hour employees
- Classifications of seasonal workers
- Use of contingent workers or independent contractors who might be reclassified as employees
Pay particular attention to departments or positions with hours near the 30-hour full-time threshold, as these represent areas of compliance risk during workforce integration.
ERISA Plan Considerations
Though separate from the employer mandate, ERISA aspects of ACA compliance should be included in due diligence. Verify that the target company has:
- Compliant Summary Plan Descriptions (SPDs)
- Summary of Benefits and Coverage (SBC) documents for all plans
- Documentation of participant communications
- Procedures for required notices
- ERISA plan documents that align with actual administration practices
Reporting and Administration Systems
Evaluate the systems and processes each organization uses for ACA administration, including:
- Tracking software for measurement periods
- Integration capabilities between payroll, HRIS, and benefits systems
- Processes for generating and distributing Forms 1095-C
- Monitoring capabilities for variable-hour employees
- Documentation retention practices
Incompatible systems can create significant challenges during integration, particularly if the transaction closes near ACA reporting deadlines.
Integration Planning and Timeline Development
Based on due diligence findings, develop a detailed timeline for post-closing ACA integration that addresses:
- When to harmonize measurement methods (if applicable)
- Coverage offering deadlines for newly eligible employees
- System integration milestones for ACA tracking and reporting
- Communication strategy for affected employees
- Process for combining workforce data for ALE determination and reporting
For complex integrations, consider maintaining parallel systems through at least one complete reporting cycle to ensure nothing falls through the cracks.
Common Pitfalls to Avoid
Several ACA compliance issues frequently arise during M&A integration:
Assumption of Identical Full-Time Definitions: Merging organizations often use different criteria for determining full-time status beyond the ACA's 30-hour threshold. These nuances must be harmonized.
Overlooking Mid-Year Changes: When transactions close mid-year, organizations sometimes fail to properly document which entity made coverage offers during different months, creating reporting challenges.
Notification Failures: Employees may require special notifications about changes to measurement periods or coverage options resulting from the transaction.
Incomplete Data Transfer: Historical hours and offer data must transfer completely to support future reporting requirements and respond to potential IRS inquiries.
Conclusion
Thorough ACA due diligence during mergers and acquisitions helps organizations identify compliance risks before they become penalties. By evaluating current practices, planning integration carefully, and documenting historical compliance, HR leaders can ensure workforce combinations proceed smoothly while maintaining ACA compliance throughout the transition.
This proactive approach not only reduces potential liability but also provides an opportunity to harmonize and optimize ACA compliance practices across the newly combined organization.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.
