ERISA is the acronym for Employee Retirement Income Security Act. It’s a 1974 act that federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. Responsibility for interpretation and enforcement of ERISA is divided among following bodies
- Department of Labor
- Department of the Treasury – particularly the Internal Revenue Service (IRS)
- Pension Benefit Guaranty Corporation
The U.S. Department of Labor offers the following interpretation of the Act,
ERISA requires plans
- to provide participants with plan information including important information about plan features and funding;
- sets minimum standards for participation, vesting, benefit accrual and funding;
- provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans;
- gives participants the right to sue for benefits and breaches of fiduciary duty;
- and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).
It is not within the scope of ERISA to require employers to establish a pension plan such as defined benefit 401(k) plan. However, it does regulate the operation of a pension plan once it has been established.
ERISA in Mergers and Acquisitions
As target firms involved in a merger arbitrage strategy are almost always publicly traded it implies they are (generally) of a sufficient size. This in turn implies a company size sufficient to operate a pension plan for its employees. Even if this were not the case, the potential for future liabilities or pre-existing commitments requires coverage of the topic in the merger agreement. As such, the ERISA act is referred to frequently in merger documents. In a March 20, 2020 DEFM14A filing made with the SEC by Wright Medical Group (WMGI) makes the following reference
(c) Each Company Plan that is intended to meet the requirements to be qualified under Section 401(a) of the Code is the subject of a favorable determination letter or is covered by a favorable opinion letter from the Internal Revenue Service, and to the Company’s Knowledge, there are no facts or circumstances that would reasonably be expected to jeopardize the qualification of such Company Plan. Except as would not reasonably be expected to result in material Liability to the Company, each Company Plan has complied in all material respects in form and in operation with its terms and with the requirements of the Code, the Employee Retirement Income Security Act of 1974 (“ERISA”), and other applicable Law.
With respect to each Company Plan that is an “employee welfare benefit plan” as defined in Section 3(1) of ERISA that is self-insured, the Company has accrued on the Company financial statements for incurred but not reported claims in accordance with acceptable commercial practice and accounting standards. Neither the Company nor any of its Subsidiaries has a formal plan, written commitment, or proposal, whether legally binding or not, and has not made a commitment to employees, to create any additional Company Plan or modify or change any existing Company Plan other than changes in the ordinary course of business consistent with past practice and that would not reasonably be expected to result in additional material Liability to the Company.
Additional Information
Employee Stock Ownership Plan (ESOP’s) are another type of defined contribution plan that is invested primarily in employer stock. As such, this term, ESOP in conjunction with ERISA are common features in merger documents. In rare instances it may be necessary for the trader to be aware of how any plans will be transferred so as to ensure the merger or acquisition transaction will consummate smoothly. Any voting rights assigned to the ESOP will also need to be taken into account at the extraordinary general meeting.
