Corporate spin-offs present a range of equity compensation, 409A, and employee benefits issues that are often under-appreciated, and lately recognized. A recent NYU publication included a comprehensive playbook co-authored by Mark Poerio and a team from TowersWatson (led by Marshall Scott). For advance planning, here is a checklist from which to get started:
Corporate Spin-offs and Employee Benefits
|Topic ||Employees Generally |
|Cafeteria || |
Determine how to treat employee FSA accounts. Two options:
(1) coverage continues under OldCo’s FSA plan for the rest of the year, or
(2) coverage is transferred to a new SpinCo plan. The latter may be less burdensome considering new IRS rollover rule
|Incentive/Bonus || |
OldCo: Determine what happens to bonus rights established for employees (both for continuing OldCo employees and for those joining SpinCo).
SpinCo: Establish new plan(s) and awards
|Retirement || |
All Plans: Address plan separation through its own spin-off, with action needed by plan sponsor and spun-off company (e.g. asset transfer, protected benefits, agreement with TPA, and appointment of new trustee and administrator).
401(k) Plans: Special attention to mapping of investments, and terms of new plan (e.g. mirror or different prototype).
|Severance || |
Pre-Spin: Evaluate whether existing plans trigger benefit claims.
Post-Spin: Establish new plan(s), and policies.
|Stock Plan || |
Pre-Spin: Determine what happens to equity awards held by employees joining SpinCo; consider 409A issues.
Post-Spin: Establish new plan(s) and awards; address desire for SpinCo to make awards for its shares, or OldCo.
|Welfare || |
All: Work with insurance carrier/service providers to establish new or mirror plans for SpinCo. New underwriting may be needed for OldCo or SpinCo due to changed pool of covered employees.
Health Only: Changes in # of covered employees may make insured plan better for OldCo or SpinCo. Self-insured plans may require transition re claims run-out, and require HIPAA and ACA compliance. Spin-off is unlikely to trigger COBRA, unless assets only.
|Employee Matters -- Generally ||In most spin-offs, a transition services agreement is the best vehicle for identifying employment and benefit-related issues, cost-sharing, and expectations. |