In this issue
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Employment benefits
Ancillary health benefits in diligence and post-close integration
By: Melissa Mayhew
Ancillary health benefits are secondary health benefits typically offered in addition to medical plans – common examples are dental, vision, life insurance, and flexible spending accounts. These ancillary benefits may be subject to annual non-discrimination testing and may or may not be covered by the Employee Retirement Income Security Act (ERISA), the federal law that establishes minimum standards for most voluntarily established private retirement and health plans. These benefits, and employee benefits overall, may not drive the transaction, but should be reviewed during diligence to avoid unexpected compliance issues or exposure and are important to review for purposes of successful post-close integration.
Executive compensation and equity
Post-closing key employee retention and equity holdbacks
By: Michelle Lara
Buyer retention of key employees post-closing can be challenging, particularly when those employees hold significant equity and receive large payouts of transaction proceeds. An increasingly common strategy used by buyers in this situation is to require such key employees to enter into a “holdback” agreement, where part of their proceeds is subject to forfeiture unless they remain employed for a set period post-closing. These agreements typically include protective provisions for terminations without cause and constructive terminations. The holdback proceeds may be paid in cash or in buyer restricted stock or stock units of equivalent economic value. This approach allows buyers to avoid costly retention packages while incentivizing continuity and smoother transitions. Buyers and sellers should seek early legal advice to understand the tax treatment and economic impact of equity holdback arrangements, which – depending on transaction type, equity classification, and payment form – may result in the conversion of capital gains into ordinary income for key employees.
Global equity
Rule change in Singapore expands tax deduction for stock-based compensation
By: Dean Fealk
The Singapore Budget 2025 introduces a significant change allowing tax deductions for stock-based compensation (SBC) settled in newly issued shares. This change addresses longstanding practical challenges faced by companies operating in Singapore by expanding the longstanding regime, which only permitted deductions for equity awards settled with treasury shares. Further guidance from Inland Revenue Authority of Singapore (IRAS) is expected by September 30, 2025, clarifying key aspects such as timing and eligibility. Companies are generally advised to await such clarifications before adapting intercompany and recharge agreements to reflect the new rules. Companies negotiating a transaction with Singaporean operations should evaluate the implications of both historical and prospective SBC arrangements in order to mitigate potential tax exposure in Singapore, including with respect to SBC expenses as part of the cost base for intercompany service fees.
Retirement plans
To be, or not to be – that is the question for retirement plans in transactions
By: Todd Castleton
A key decision point in any transaction is whether to continue a target’s 401(k) plan after closing – either by operating it continuously or merging it into the buyer’s plan – or to terminate it at least one day before closing, as required by the Internal Revenue Service’s current position. Buyers may choose to continue the plan if there is a delay enrolling employees into the buyer’s plan, or if the target’s plan includes investment options with a put (eg, stable value funds) that could delay liquidation or require a significant market discount. Alternatively, termination may be preferred if diligence reveals poor plan administration or to avoid triggering the successor plan rule, which restricts participation in another 401(k) plan for a year if termination occurs at or after closing. If terminating, select a date that aligns with the end of a full pay period to simplify payroll. Terminated plans must also be amended to comply with current laws, including if the plan has implemented any SECURE 2.0 options. See our qualified retirement plans agenda for more.
Tax
Tax considerations when target company uses cash method of accounting
By: Jordan Bailowitz
In the M&A context, tax diligence may reveal that a target company uses the cash method of accounting, especially when it is a closely held flow-through entity for income tax purposes, such as an S corporation or partnership (including LLCs classified as partnerships). This can present tax issues for both purchasers and sellers. If the transaction is structured to result in asset sale treatment for income tax purposes, the parties may need to agree whether any portion of the purchase price may be allocated to the target company’s accounts receivable. Any portion of the purchase price allocated to net accounts receivable may result in ordinary income, rather than capital gains, for the seller. On the other hand, if the buyer agrees to allocate purchase price among the purchased assets in accordance with the seller’s tax basis, the seller may not have ordinary income attributable to its net receivables, and that income may be shifted to the buyer in a post-closing tax period. In addition, if the transaction involves a tax-deferred rollover, or if the target company is classified as a corporation for income tax purposes, the party that bears the burden of the tax associated with the target company’s receivables may depend on the structure of the transaction. Adjustments to the purchase agreement may be required to ensure that the party bearing the tax burden associated with the target company’s receivables aligns with the business deal.
