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Mergers & Acquisitions, Advanced

Mergers & Acquisitions, Advanced. Presented by. Jared Vale Director of Strategic Compliance Barnett Associates, Inc.

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Mergers & Acquisitions, Advanced

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  1. Mergers & Acquisitions, Advanced

  2. Presented by • Jared ValeDirector of Strategic ComplianceBarnett Associates, Inc. • Brent Gow, CPPDirector, Global PayStarbucks Coffee Company Immediate Past President, American Payroll Association • Cheryl Schmidt, CPPManager, Payroll TaxProgressive Group of Insurance Companies

  3. Due Diligence Obtaining payroll data is one of the single most important elements that can be undertaken by the payroll department once a merger or acquisition is announced.

  4. M&A Planning Considerations Asset Purchase • Federal Wage Base Credits • State Unemployment Wage Base Credits Statutory Merger or Consolidation • Federal Wage Base Credits • State Unemployment Wage Base Credits Equity Purchase

  5. W-2 Reporting 941 Reporting Schedule D Liens Notices (Liens) Deposits Untimely Unpaid Non-Credited Unfiled/late tax returns On-going audits EE vs. Indpt. contractor Failure to withhold and report income taxes Jeopardizes corp income tax deductions SUI Tax Rate Penalties (You Buy It You Own It!!!) Liability Issues

  6. Data Requirements • Federal employer identification number(s) • State account number(s) • unemployment • withholding • Local account number(s) • Number of employees per state, per legal entity • Payment frequency(ies) • Union vs. Non-union employees • Special pays • Deductions

  7. Data Requirements (Continued) • Software applications and platform • Request copies of all federal, state and local tax returns for the last 3 years • Forms 941, 940, W-2, 1096 (1099 MISC) • Form 941 Schedule D (used for M&A activity) • Request an account balance statement or business master file from the federal and state taxing jurisdictions (obtain a Power of Attorney) • Obtain a statement from third party payroll provider, if applicable • State unemployment rate notices • ORIGINAL and/or AMENDED

  8. Part I: Unemployment TaxesPlanning & Compliance

  9. State Unemployment Merger & Acquisition Considerations

  10. Estimated Tax Cost

  11. ABC’s of Unemployment

  12. Restructure Type

  13. Unemployment Considerations

  14. UI Considerations Cont… Tax Cost Increase Decrease No Effect Analyze Saving Examples Tax Rate Predecessor Rate Successor Rate Blended Rate New Employer Rate Min / Max / Penalty

  15. Total vs. Partial Transfer Total Experience Transfer Mandatory - maybe Wage History Transfer Yes Forms Vary Disposition Partial Experience Transfer Optional - maybe Wage History Transfer 16 quarters of history (maybe)

  16. Transfer Rate vs. NBR: Example Example based on estimated 1,700 employees

  17. Wage Base Credits - Continuation 20 states apply automatic credit (maybe) 30 states require transfer of experience Interstate Credits (not Minnesota)

  18. Wage Base Credits: Example 300 employees transferredfrom Company A to Company B effective July 1, 2010. Transferring the year-to-date wages from the predecessor to the successor saved as follows:

  19. Voluntary Contribution: Anticipated Growth A company with 30 employees opened up a new plant in MO in 2010 (adding 1,100 employees)

  20. Develop Game Plan Who Successor or Predecessor? What Assets or Stock (Tax Cost Impact)? When Mid-Year transaction or 12/31 vs. 1/1? Where Major States involved Payroll coming and going? Why Planned or Forced? How How do I stay in compliance? Questionnaire / Checklist / Chart

  21. Experience Rate Vs. Reimbursable • Experience Rated Company – • Est. Annual Benefit Charges - $10,000

  22. OOPS!!! • RIF – 299 Employees

  23. Avoidance or Evasion “ Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible.  Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands:  taxes are enforced exactions, not voluntary contributions.  To demand more in the name of morals is mere cant.” Judge Learned Hand Commissioner of Internal Revenue Service v. Newman 159 F.2d 848,850 (1947)

  24. What to Expect??? Increase in Tax Rates Increase in Taxable Wages Increase in Compliance Responsibilities Increase in Penalties and Interest Increase in Independent Contractor Inquiries Increase in Everything

  25. FUTA Tax Review Potential Employer Tax Cost If employer pays state SUI taxes timely and in full, a 5.4% credit is granted If Federal Title XII loan remains outstanding for two years, employers in the affected state lose 0.3% of the 5.4% credit (or $21 per employee) 0.3% FUTA credit loss continues for every year the Federal Title XII loan remains unpaid (Example: Year 1 = 0.3%; Year 2 = 0.6%, etc.)

  26. Recent Federal Legislative Changes Currently 28 states owe over $38 billion to the federal government for Unemployment Account Balances 21 States defaulted in 2011, and there are a projected 24 states that could default in 2012

  27. Federal Loan – Title XII Update Outstanding Title XII Loans from Federal Unemployment Account over a BILLION

  28. 2012 NET FUTA TAX RATES (*) Assumes state will default on 2012 Federal Loan (a) Qualified for credit reduction avoidance (b) Sold bonds to pay Federal Loan (c) Expected to sell bonds to pay Federal Loan Please use the link below to view the current Outstanding Loans from the Federal Unemployment Account. http://workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans Source: United States Department of Labor

  29. 2012 NET FUTA TAX RATES (*) Assumes state will default on 2012 Federal Loan(a) Qualified for credit reduction avoidance (b) Sold bonds to pay Federal Loan (c) Expected to sell bonds to pay Federal Loan Please use the link below to view the current Outstanding Loans from the Federal Unemployment Account. http://workforcesecurity.doleta.gov/unemploy/budget.asp#tfloans Source: United States Department of Labor

  30. Recent State Legislative Changes Taxable wage bases increased in 24 states, from 2009 vs. 2010 15 states have increased taxable wage bases from 2010 vs. 2011, 26 states have already increased their wage bases for 2012 Currently, 10 states have reached the maximum level on their Tax Rate Schedule As a direct result of employer protests, a few states have repealed tax rate and wage increases: FL, HI, IN, MA

  31. Part II: Compensation & Benefits Issues and Concerns

  32. Preparation • Before due diligence begins, be prepared! • What are we buying and from whom (legal entity)? • If public company, review SEC filings (e.g., 10k and proxy) • Have a detailed list to avoid surprises • Prepare an analysis of target’s programs and departments (e.g. benefit plans, compensation, international, human resources, and payroll departments) • REMEMBER - communication is critical

  33. Due Diligence Identifies exposures relating to compensation, benefits, payroll & other HR concerns • Compensation • Review employment agreements, stock option plans and other contracts for acceleration of vesting and change in control provisions • Look for Golden Parachute exposures • Valuation of liabilities (options, bonuses, SERPs, perks) (check balance sheet for liabilities) • Sarbanes Oxley Controls for pay distributions

  34. Due Diligence (continued) Identify hidden liabilities in (these areas) • Benefits • Qualified retirement plans (e.g., change in control provisions, under funding, operational defects) • Vacation • Severance • Long-term Disability • Self Insured Medical (e.g., unpaid claims, experience) • Others

  35. Due Diligence (continued) • Human Resource Culture, Strategy and Policies • Organizational Development Culture • Systems (HR, Benefits, Training, Stock) • International Considerations • Expatriate Employment Contracts • Tax Equalization Agreements • Hypo Tax Considerations • International Assignee Policies and Procedures

  36. Due Diligence (continued) • Third Party Vendor Considerations • Employment tax filing • Withholding orders • Relocation administration • Disability processing • Income & Employment verifications • State unemployment claims • Deferred compensation • W-2 printing & distribution, Check printing • Debit Cards, Electronic W-2s • Cobra administration

  37. Compensation & Benefits: Plans and Programs Compensation & Benefit Plans/Programs • Employment agreements & contracts • Stock options plans & programs • Reporting & disclosure • Qualified plans • 401(k) plans • Profit sharing plans • ESOP • Defined benefit plans) • Deferred compensation plans (non-qualified) • Health & welfare benefits • Bonus plans • Special payments • Unions Issues • Change in control, accelerated vesting, payouts, loan/payments discharged, benefits, severance • Accelerated payouts and vesting • Timeliness, penalty – free • Matching contribution, refunds, testing, loans, investments, eligibility, timing of contribution, ESOP loan, funding, service providers, vesting, company contribution, payroll requirements, actuarial issues, multi & multiple employer plans • Number, types, eligibility, funded or unfunded • Plan options, waiting periods, fully insured or self insured, contributions, VEBA retiree medical, number on COBRA leave of absence, short & long term disability, and FMLA • Number, how calculated, form of payment • Discuss any special payments (sick pay, severance, vacation pay, perks) • Obtain collective bargaining agreements; issues include successor liability, contributions to multi-employer plans, withdraw liability

  38. Post-Merger Integration • Payroll system integration with HR, Benefits, Comp, G/L • Executive compensation design • Benefit plan integration • Standardizing pay and work rules • Organizational Change Management Initiatives (cultural assessment, communication, team building, systems) • Expatriate Assignee consistency with policies and procedures • If problems are identified early, their associated liabilities may allow Buyer to use strategy (e.g., negotiate, reduce purchase price, terminate prior to purchase) • Avoid taking over problems – clean-up is expensive • Get documents you need prior to the sale – otherwise Good Luck!

  39. Where is Unemployment Being Felt and Why Have Costs Increased?

  40. Unemployment Trust Fund Solvency 4th Qtr. 2008 Above Average > .71 AHCM (22 Jurisdictions) Average .53 - .70 AHCM (6 Jurisdictions) Potential Risk .31 - .52 AHCM (9 Jurisdictions) Watch States < .30 AHCM (13 Jurisdictions) Outstanding Title XII Loans (3 Jurisdictions) Source: U.S. Department of Labor Fourth Quarter 2008 * Jurisdictions include 50 U.S. States, DC, PR and VI

  41. Unemployment Trust Fund Solvency July 31, 2012 Solvent Trust Funds (33 Jurisdictions) Insolvent Trust Funds (20 Jurisdictions) * Jurisdictions include 50 U.S. States, DC (Solvent), PR (Solvent), and VI (Insolvent)

  42. Legislative Changes STATE FEDERAL Since December 2008, 32 states have borrowed over $40 billion from the federal government. If any of these states can’t pay back their balance within two years of borrowing, employers will lose 0.30% of the FUTA tax credit annually. 21 states defaulted in 2011 19 states defaulted in 2012 19 states are projected to default in 2013 • 15 states increased taxable wage bases from 2010 - 2011 • 26 states increased taxable wage bases from 2011 - 2012 • 23 state increased taxable wage bases from 2013 - 2012 • 2 states decreased taxable wages from 2013 - 2012 • 4 states increased rate schedule or rate calculation factors from 2012 – 2013 • 11 states decreased rate schedule or rate calculation factors from 2012 - 2013

  43. 2012/13 Taxable Wage Base Increases

  44. 2012/13 Taxable Wage Base Increases(Continued)

  45. FUTA Tax ReviewPotential Employer Cost Impact Please Note: • If Federal Title XII loan remains outstanding for two years, employers in the affected state lose 0.30% of the 5.4% credit (or $21 per employee) • 0.30% FUTA credit loss continues for every year the Federal Title XII loan remains unpaid (Example: Year 1 = 0.3%; Year 2 = 0.6%, etc.)

  46. Title XII Loan Update $1 Billion Borrowers

  47. (Net) 2013 FUTA Tax Rates (*) Assumes state will default on 2012 Federal Loan (a) Qualified for credit reduction avoidance - (b) Sold bonds to pay Federal Loan - (c) Expected to sell bonds to pay Federal Loan

  48. (Net) 2013 FUTA Tax Rates (*) Assumes state will default on 2012 Federal Loan (a) Qualified for credit reduction avoidance - (b) Sold bonds to pay Federal Loan - (c) Expected to sell bonds to pay Federal Loan

  49. Federal Unemployment TaxSUI Impact if Taxable Wage BasesLess Than $15,000 Proposed 2014 increase to 15,000 for FUTA wage base

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