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.
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.
During due diligence, thoroughly examine the target company's ACA compliance history, including:
Look specifically for indicators of potential liability that could transfer with the acquisition, such as:
If compliance issues are identified, consider negotiating specific indemnifications or purchase price adjustments to account for potential penalty exposure.
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:
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.
Compare health plan offerings between the organizations, with particular attention to:
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.
Examine how each organization classifies its workforce, looking for:
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.
Though separate from the employer mandate, ERISA aspects of ACA compliance should be included in due diligence. Verify that the target company has:
Evaluate the systems and processes each organization uses for ACA administration, including:
Incompatible systems can create significant challenges during integration, particularly if the transaction closes near ACA reporting deadlines.
Based on due diligence findings, develop a detailed timeline for post-closing ACA integration that addresses:
For complex integrations, consider maintaining parallel systems through at least one complete reporting cycle to ensure nothing falls through the cracks.
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.
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.