Keeping Benefits Simple During M&A

Keeping Benefits Simple During M&A

Keeping Benefits Simple During M&A: Mergers and acquisitions are an attractive growth strategy for many banks, but deals are increasingly and needlessly complicated by existing employee benefit plans.

The United States entered the longest economic expansion in history during the third quarter of 2019, surpassing the 120-month run between March 1991 to March 2001. There have been parallels of economic events and potential perils between then and now: a strong housing market, corporate tax cuts, low interest rates and a mergers and acquisitions environment that rivals the 1990s, resulting in a loss of more than 4% of the nation’s banks per annum on average. From March 1991 to today, the number of banks in the U.S. has decreased by over 60%. The industry is not only used to M&A, but expects it.

But in recent years, we’ve seen a growing burden and complexity of navigating through bank M&A deals, in part due to existing non-qualified benefit plans and bank-owned life insurance, or BOLI, programs. Executives face the task of understanding the heightened regulations on allowable plan designs for non-qualified benefits, evolving tax laws, stricter compliance and due diligence requirements and the inadvertent impact that the Tax Cut and Jobs Act has had on transfer for value.

Now more than ever, it has become increasingly likely that BOLI or non-qualified benefit plans will be involved in a transaction, and odds are that the acquired portfolio and plans were part of a previous deal.

According to data obtained from S&P Global Market Intelligence, about 64% of banks across the United States owned BOLI at the end of 2018, including 63% of banks under $2.5 billion in total assets, 82% of banks between $2.5 billion and $35 billion and 64% of banks over $35 billion.

The BOLI market continues to expand as banks continue to consolidate, and new premium sales have averaged over $3.5 billion annually in the past five years. Additionally, approximately 65% of banks have a non-qualified benefit plan, split-dollar life insurance plan or both, based on records of Newcleus’ 750 clients.

Program sponsorship continues to expand, because BOLI and non-qualified benefits continue to be important programs for institutions. Implementing of non-qualified benefit plans can serve as a valuable resource for banks looking to attract and retain key talent. It is essential that both selling and acquiring institutions understand the mechanics of benefit and BOLI programs to avoid inaccurate plan administration and mismanagement following a combination. This includes:


Non-Qualified Benefit Plans:


  • Reviewing the Plan Agreement: Complete a thorough analysis of the established plan agreements. Understand all triggering events for benefits, available options to exit the plan and the agreement’s change-in-control language.
  • Accounting Implications: The Bank, in partnership with their plan administrator, should properly vet the mechanics and assumptions used in existing plan accounting.[MB1] [MOU2] For example, change-in-control benefits could specify a discount rate that must be used for benefit payments, which may differ from rates used on existing accounting reports. They should also ensure that all deemed de minimis plan benefits have been accounted for, such as small split-dollar plans.
  • 280G: Complete a 280G analysis to understand the possible implications of excess parachute payments, including limitations (i.e. net best benefit provisions) caused by existing employee agreements and related non-compete provisions.


BOLI Programs:


  • Insurance Carrier Due Diligence: Bankers should complete a thorough review to ensure that acquired BOLI meets the holding requirement that is outlined by the bank’s existing BOLI Investment Policy, if applicable.
  • Active/Inactive BOLI Population: As the insured and surviving owner relationship becomes more separated, it is paramount that executives maintain detailed census information, including Social Security numbers, for mortality and insurable interest purposes.
  • Policy Ownership: Many banks have implemented trusts to act as owner of certain BOLI policies. While this setup is permissible, changes of control can impact a trust’s revocability. Institutions should review this information prior to closing, given that there may be limited options to directly manage those policies post-deal close.

These programs are not in the executives’ everyday purview, nor should they be. That’s why it’s so important for institutions to establish partnerships that help guide them through the analysis, documentation and due diligence process for BOLI and non-qualified benefit plans.

Banks may want to consider working with external firms like Newcleus to conduct a thorough review of existing programs and examine all plan details. They may also want to consider administrative systems, like Newcleus MINTS, that streamline reporting and compliance requirements. Taking these steps can help reduce unnecessary headaches, and create a solid foundation for future BOLI purchases and new non-qualified benefit plans.

We know about keeping benefits simple during M&A when faced with the shifting paradigms of mergers and acquisitions. Learn more.