Balancing Business Strategies: Workforce Realignment Considerations Under ACA

Like most employers, you’ve probably spent the last several months wading through a sea of information on the Patient Protection and Affordable Care Act (“ACA”). You may have even begun devising a strategic plan that addresses the Employer Shared Responsibility rules released earlier this year by the Department of the Treasury dubbed as the “Play or Pay” provisions.  But just when you think you have it all figured out, there is another set of potential issues to consider before implementing an ACA compliance strategy; the provisions of the Employee Retirement Income Security Act (ERISA).

Most employers are familiar with ERISA when it comes to vested benefits such as retirement plans, but ERISA also applies to non-vested benefit plans including health insurance coverage.  Section 510 of ERISA specifically prohibits certain actions that could interfere with an employee’s attainment of a right to a benefit. The statute provides, in part, that “it shall be unlawful for any person to  . . . .  discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.”  And, that is where the rub comes in.

ERISA §510 and Workforce Restructuring

In 2014, under the ACA, large employers (those with 50 or more full time equivalent employees) will be required to either offer affordable health coverage to full time employees (classified by ACA as those working 30 or more hours per week) or be subject to a “No Coverage” excise tax as codified in §4980H of the Internal Revenue Code.   The ACA’s mandate is an either/or proposition and this key point should not be overlooked during ACA compliance planning.

Many large employers have indicated that they will consider adopting financial strategies aimed at minimizing their exposure to Play or Pay penalties through workforce realignment initiatives designed to replace full time employees with part time workers and further limit hours worked by part time employees to fewer than 30 hours per week.   This is a strategy that may be particularly attractive to employers with variable, per diem workforces; high turnover and/or lower paid workers.   In certain cases, however,  workforce restructuring efforts may open up ERISA §510 exposure and, as a result, employers considering realignment strategies will want to tread carefully and ensure that their actions to minimize exposure to penalties under the ACA don’t end up creating replacement liability under ERISA.

To bring an action under ERISA §510, an employee is required to demonstrate that his employer interfered with an ERISA guaranteed right to participate in the employer’s health plan.   However, since health benefits are not considered vested for purposes of ERISA, employers are free to periodically modify coverage provided as well as eligibility for benefits under an existing health plan without interfering with rights guaranteed to employees.   Thus, modification of the health plan or modification of an employee’s work requirements does not, in and of itself, constitute a problem under ERISA.    On the other hand, if an employee is eligible for health care benefits under an existing plan and the employer curtails working hours specifically to create ineligibility for attainment of coverage and/or avoid a potential “Play or Pay” penalty, an ERISA complaint may be actionable.

Consider the following examples:   The employer currently offers healthcare coverage to all of its full time employees who work 40 hours per week and their dependents.  Part time employees who work fewer than 40 hours a week are not eligible for coverage.  In 2013, as a means of avoiding the 2014 No Coverage penalty, the employer adopts a workforce realignment plan that effectively reduces the hours for all current non-covered, part time employees to less than 30 hours per week by the close of the year.  Because the employer has not interfered with any part-time employee’s current or attainable right under the employer’s health plan, the realignment action would not be considered an ERISA violation.

On the other hand, if the employer goes further and similarly reduces the hours of full time employees who are either currently covered or who expect to be covered after satisfaction of a plan waiting period, a §510 claim would likely survive because, in this instance, the employer has interfered with a current or attainable benefit under the plan.

Alternatively, consider the employer who has traditionally offered healthcare coverage to all of its employees who work at least 4 days, or 32 hours, per week.  After performing an analysis of anticipated premium increases, the employer concludes that it must limit its offer of coverage to a smaller employee group working at least 40 hours per week because it simply cannot afford to continue benefits for an expanded portion of its workforce.  Thus, the employer modifies the eligibility provisions of the plan to require at least 40 hours per week as the threshold for coverage eligibility and changes other coverage provisions of the plan to reduce the impact of the expected premium increase while also, subsequently, cutting the hours of current employees who work fewer than 40 hours per week, limiting them to no more than 24 hours/3 days per week to avoid exposure to the “Play or Pay” penalties.  In this case, an affected employee who loses hours but who is no longer eligible for coverage due to the changed eligibility requirements would likely have no claim under §510 of ERISA.

In all cases, it is imperative that employers considering realignment strategies that could result in plan changes and/or workforce changes should consult with qualified counsel to determine the risk associated with HR strategies in the face of the ACA requirements.  2013 will be a year of careful planning and analysis of what the ACA means to employers and it is not too soon to start thinking about compliance strategies that will minimize risk as well as financial impact.  And, as always, when dealing with issues related to ERISA rules, consult with qualified counsel.

Process Pays: Know The Path Before You Start

Consider these statistics:

• Only 20% of all of the businesses listed for sale actually sell.
• 75% of all anticipated business sales fail to close.
• The average time it takes to sell a business is 225 days, but 2 years is not uncommon.
• Failure to perform pre-sale planning is the #1 reason why deals fail.
Business owners who take the time to prepare their business for sale are much more likely to sell the business, sell it in less time, for a fair amount, and with better terms. What does that preparation involve? Understanding the sales process will go a long way toward beating the odds against successful completion of the sales transaction.
Timeline–Owners commonly sell their businesses for any of the following reasons: retirement, partner disputes, illness and death, becoming overworked, or boredom. Preparing for the sale as early as possible provides the seller an opportunity to improve financial results, business structure and customer base to make the business more profitable and, therefore, more attractive to a buyer. An owner who has the time to plan for a sale should begin to do so at least one to two years ahead of his/her expected exit.
The Team—Professionals with experience in handling issues involved in the sale of the business are critical to the process. A business broker, business valuation expert, CPA, attorney and other trusted advisors should work as a team to navigate the sale from the time it is listed to closing.
Business Valuation—Before an owner lists the business for sale, it’s worth must be determined. This is important to ensure that the asking price is not too high or too low. A business valuation expert will draw up a detailed explanation of the business’s worth. The document will add credibility to the asking price and can serve as a gauge for the listing.
Marketing—The Selling Memorandum (also called a Deal Book) is essentially the formal sales listing. It is an advertisement of a business’s strengths without giving too many of its trade secrets away to competitors. It includes financial information, growth potential, the company’s history, a description of the customer base, marketing strategy, how the business differs from its rivals in the market, where it is located, number and nature of employees and management staff, details of the ownership structure, and why it is for sale.
Letter of Intent—Effective marketing efforts will ideally identify serious, qualified buyers. A potential buyer submits a letter of intent (LOI), which serves as the starting point for negotiations. The LOI serves to formalize the purchase process by setting out basic terms and conditions of the sale. It is a non-binding agreement that states the prospect’s thinking in terms of valuation, deal structure, post-sale plans, etc. It sets out what the transaction actually involves, explaining what will be paid and when, what assets the company has, the contractual obligations already in place, other liabilities, employment contracts, and precisely what the buyer expects to purchase. The LOI also usually includes a standstill or exclusivity clause for a certain period of time that prohibits the seller from seeking other purchasers while the standstill is in place. At the very least, the LOI establishes whether the buyer and seller are within negotiating range of a deal.
Due Diligence— This is the verification phase of the process and typically the least enjoyable, most stressful, part of selling a business. Due diligence is the buyer’s opportunity to verify that the information provided by the seller is indeed true and accurate. The process delves deeply into the business to allow the buyer to achieve comfort in committing to the purchase. The buyer generally brings in an accountant in to examine the financial records of the company and often a lawyer to review certain documents such as incorporation papers, corporate minutes, leases, and contracts the business may have in force. It is not uncommon for a buyer to conduct financial audits, environmental audits, IT audits, and interviews with key employees and other specialized due diligence activities that may be industry specific. Unfortunately, half of all deals fall apart in the due diligence stage because of facts and/or circumstances discovered during due diligence. It is not rare to discover financial reporting issues or previously undisclosed facts that could affect the price or even salability of the business. For some, it simply boils down to the fact that the seller may not be able to provide the documentation that the buyer needs to complete the deal.
Final Negotiations and Deal Structuring— Concurrent with the due diligence activities is when the last phase is entered– final negotiations and deal structuring. Here is where additional agreements are drafted including exhibits, schedules, consulting agreements, leases, assignments, and third party consents. The final agreement will basically state what is being sold and for how much, what exactly happens upon closing, how existing contracts and debts are transferred, and any warranties or indemnities. It could also include a restrictive covenant preventing the seller– within a particular time period and/or geographic area – from competing with the business once it is sold. It also arranges for escrow, which is where a third party holds the purchase money until all conditions of the sales agreement have been met, such as the actual transfer of the assets to the buyer. Usually, the agreement goes through many drafts, and it’s not finalized and signed until closing.
There are a number of factors that can arise at any point in the process which will impede the negotiations or kill a deal entirely. It is not uncommon for a buyer to walk away because the seller is slow in getting information. Being prepared for the process will help eliminate the deal breakers which are avoidable, and allow the owner to focus on the elements which will result in an ideal transaction.
This is Part II of a four part series on selling a business. Read C3 Advisors’ blog for Part I on Build for the Buyer, and future articles on Combining Cultures, and Tax Tactics.