The purpose of an Employee Benefits Agreement is to set forth the agreement of two or more companies, or subsidiaries of the same company, regarding the allocation and assignment of their respective rights and obligations with respect to their current and former employees and with respect to benefits and compensation matters. It is usually an agreement that covers what will happen to a company’s employee benefit plan as a result of another agreement being executed. For instance, when two companies merge, an employee benefit agreement is often needed to address the new liabilities, interests, and obligations of the newly merged company in respect to the Employee Benefit Plan.
An Employee Benefit Agreement must address any change to any of the material aspects of an employee benefit plan. These could include changes to the employees defined benefit plans, defined contribution plans, health and welfare plans, executive benefits, non-employee director benefits, pension plans, and employee retirement plans. In an employee benefit agreement executed in tandem with a merger agreement, the agreement can be broken down into the following articles:
1. Definitions. This article should define all the key terms used in the agreement. Key terms may include the companies’ abbreviated names as they will be used, how certain kinds of employees will be referred to, or key laws or statutes such as ERISA (the Employee Retirement Income Security Act of 1974) that will be of particular importance throughout the agreement.
2. General Principles. This article must address assumption of liabilities, and must clearly identify who is assuming which liabilities in respect to the employee benefits plans. One company may be assuming liabilities of another, or a newly merged corporation may be assuming liabilities from two smaller ones. Whatever the case, the assumption of liabilities must be addressed in this General Principles article. As well, both companies’ new level of participation should be addressed.
3. Defined Benefit Plans. This article should address subjects such as the establishment of a mirror pension plan, any assumption of liabilities by the new pension plan, how the assets of the plans should be computed and allocated, and how the transfer of one company’s pension plan’s interests to a separate trust account will be effectuated.
4. Defined Contribution Plans. Any changes to the employees’ retirement savings plan or stock ownership plan must be addressed in this section. If the new company will be assuming liability for all savings and stock ownership plans, the agreement must recite that the new company will now be solely responsible, will cause the accounts to be transferred, and shall take such actions as may be needed to cause the assets associated with all transferred accounts to be transferred to a new trust for purposes of maintaining the savings and stock ownership accounts. If a new outside company will be taking over as administrator, this should be identified as well.
5. Health and Welfare Plans. This article should address the administration of the employee’s health and welfare plans, which includes insurance, workers’ compensation, and retirement plans as well. Will the new company assume the liabilities for these plans? Will an outside company be engaged to administer them? Will there be a change in any material terms of the plans? These questions must be answered in this section.
These are the most important areas to address when drafting an Employee Benefits Agreement. Essentially, these types of agreements address any changes made to an employee benefits plan as a result of another agreement being made. They must be drafted carefully to cover all aspects of a transfer or assumption of liabilities.
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