employee benefits due diligence: project alpha (abc company) · due diligence: project alpha (abc...

Employee Benefits

Due Diligence: Project Alpha (ABC Company)

Michael Aronson Partner - Risk Management Services E-mail: [email protected] Direct: 516.750.7512

Kevin Quinn Partner - Health & Benefits Services E-mail: [email protected] Direct: 516.247.3342

Steven R. Marcus, ASA, EA, MAAA, FCA Vice President & Senior Consulting Actuary - Retirement Plan Services E-mail: [email protected] Direct: 516.247.3402

Mark Schneiderman, PhD Partner - Compensation & Human Resources E-mail: [email protected] Direct: 646.683.6100

cherrybekaertbenefits.com 1

Scope of Work

The purpose of our analysis is to:

identify any high level red flags or liabilities

associated with the Risk Plans and Business

Insurance, Health & Welfare, Retirement, and

Executive Compensation Plans for ABC

Company (“ABC”); and

analyze the coverage and costs associated with

the plans.

The scope of work includes of the following:

Review and comment on the current insurance

policies for ABC’s therapy business.

Review any applications and backup information

used in the underwriting submission for ABC’s

therapy business current insurance policies.

iProvide analysis of any coverage concerns;

projected costs by line of coverage; assessment

of material deficiencies in the insurance policies;

and claims analysis.

Understand the operational and financial

exposures of ABC.

Identify areas of potential liability and financial

aspects of the Health & Welfare plans and

Retirement Plans that should be discussed and

either addressed or corrected at close.

Scope Limitations

This report is based solely on the documentation

and data provided by ABC. In preparing this report,

we have assumed that all information provided to

Cherry Bekaert Benefits Consulting (“CBBC”) to date

is true, complete and accurate. We do not assume

responsibility for the accuracy or completeness of

the information provided.

Non-Reliance

Third parties may not rely on the report for any

purpose, and CBBC will have no liability to the third

party with respect to the report.


Risk Management Diligence – Key Findings

Products, Medical Professional

Liability, and Errors and

Omissions Coverage

The coverage trigger for the liability policies is a

combination of the retroactive date, products

manufacture date, the terms of the purchase

agreement, and the date that the claim is presented

and reported to the insurer.

In order to avoid potential coverage gaps in

products, professional, and errors and omissions

coverage post transaction, we recommend using

a “Continuum” policy. This policy is purchased

separately from the policies purchased for the

ongoing operation after the transaction is closed.

The policy is the best option to eliminate

potential gaps due to coverage triggers, it

provides a single coverage amount with no

deductible, and the cost is similar to adding

retroactive and extended reporting coverage to

the existing policies.

The underwriting for this coverage can take a

few weeks. We recommend that the process is

started as soon as a closing date is established.

Management Liability Coverage

It is crucial that ABC Company consider the impact

of the transaction on the Directors and Officers

Liability Coverage.

The management of ABC Company should

consider if the current coverage limit is adequate

considering the significantly increased sized

financial scale of the business post close.

ABC Company must verify that the underwriters

will approve coverage for the new operation. We

expect that transaction will be carefully

scrutinized based on the “Going Concern”

wording in the financials for the therapy

business.

We were not provided information regarding the

current Management Liability program for ABC.

We recommend that ABC be required to

maintain or extend their coverage for Directors

and Officers and Employment Practices

Coverage for five (5) years post close.

Assuming the employees of the therapy

business will not be part of the ABC Company

Total Source plan, we recommend that

Employment Practices and Employee

Dishonesty coverage is in force on the closing

date. Please consider the time needed to

negotiate terms for these with the carriers.

Property and Business Income

Coverage

With the main facility for the therapy business in

Tampa, Florida, the risk of a property and

business income coverage loss is concentrated in

a location that is considered by the underwriters to

be exposed to a catastrophic windstorm claim.

Further, the insured values in Tampa are

disproportionate relative to the balance of ABC

Company‘s property coverage.

The availability of coverage could be an issue

and the cost for coverage may be higher than

the current program.

The property deductible for a windstorm loss at

the Florida location could be $4,600,000. ABC

Company may want to consider alternative loss

funding programs to address the self-insured

portion of the risk.

We were unable to determine the property and

loss of income coverage amounts for the

therapy business separate from the balance of

ABC’s operation. We recommend that the limits

are verified post close.


The Stock Throughput property policy

includes coverage for property in transit. We are

unable to determine the transit risk for the

therapy business as a standalone operation and

if the Throughput policy is needed.

Workers Compensation

Workers compensation coverage is required in all

States and coverage must me in effect when the

transaction closes. It is our understanding that ABC

Company uses ADP’s TotalSource for workers’

compensation coverage.

It is possible that ADP will not agree to add the

therapy business to the ABC Company program

due to adverse loss experience over the last few

years.

We recommend that ABC Company considers

creating a workers’ compensation program for

the entire organization prior to or shortly after the

closing. A loss sensitive program that pays

dividend based on the ratio of losses to premium

has the potential to significantly reduce the cost

of coverage.

Additional research is needed to determine is

the loss experience charge will apply to the

therapy operation post close and if the factor has

changed. Based on the loss information, we

believe that the factor will improve and the

premium adjustment could reduce the cost by as

much as $60,000.

Cyber Liability Coverage

Cyber Liability Coverage is not included in the

current program. We recommend that ABC

Company consider the financial exposure if

personally identifiable information in their control is

attacked by a third party. The cost per record for a

breach can be as much as $300.

Premium Adjustments

Premium adjustments for the current program will

result from changes to the coverage and audits of

the payroll amount that was utilized to calculate the

deposit premium for the workers’ compensation

policy.

There are no loss sensitive or retroactive rating

adjustments to the current policy.

ABC will be responsible for any premium

adjustments on the current policies.

Carrier Financial Ratings

CBBC recommends that all insurance coverage be

placed with carriers who have a minimum financial

rating of A‐, VII from A.M. Best. Insurance

companies who do not meet this standard are

susceptible to financial difficulties which can impair

their ability to pay claims. All of the carriers providing

coverage in the current program meet the financial

rating standard.


Current Program – Carrier & Premium Summary

Policy Policy Term Insurance Company Annual Premium Limits and Deductibles

Property &

Business Income

Policy

January 4,

2016-17

Factory Mutual

Insurance Company

$849,683 $250,000,000 for prop damage

and business including with

sublimits at specific locations;

$100,000 deductible except

2% with a $4.4 million max at

Tampa locations for losses

from wind

Products and

Errors &

Omissions (E&O)

Liability

Coverage

April 12, 2016-

17

ACE Insurance

Company

$210,000 $10,000,000 per claim and

aggregate

$100,000 retention

Commercial

Automobile

Coverage

April 12, 2016-

17

Travelers Insurance

Company

$10,143 2 units - $1,000 deductibles

$1,000,000 auto liability

Excess Liability

Coverage

December 25,

2015-16

ACE Insurance

Company

$21,345 $25,000,000 limit;

excess auto, workers

compensation, and foreign

liability

Workers

Compensation

Coverage

April 12, 2016-

17

Travelers Insurance

Company

$428,370 $57,349,654 total payroll;

1.16 experience mods;

guaranteed cost program

General and

Medical

Professional

Liability

Coverage

April 12, 2016-

17

ACE Insurance

Company

$148,000 $10,000,000 per claim and

aggregate;

$100,000 medical professional

retention;

$25,000 general & employee

benefit retention

Fiduciary

Liability

March 7, 2016-

17

Travelers Insurance

Company

$11,721 $3,000,000 fiduciary liability;

$1,000,000 crime

Excess Liability

Coverage

April 12, 2016-

17

Ironshore Insurance

Company

$280,000 Excess of Products, E&O,

general, and medical

professional liability


Cargo Stock

Throughput

Coverage

October 29,

2016-17

Lloyd’s of London $450,000 $10,000,000 transit;

$40,000,000 Tampa location;

various limit for other listed

locations/

$100k deductible/$250k

deductible for wind losses

Foreign Package April 12, 2016-

17

ACE Insurance

Company

$4,514 $1,000,000 foreign general,

auto, and employer’s liability

Flood Coverage July 2, 2016-

17

FEMA $2,650 5800 Building Tampa -

$500,000 building and

contents

Flood Coverage June 19, 2016-

17

FEMA $2,650 5900 Building Tampa -

$500,000 building and

contents

Environmental

Coverage

April 12, 2016-

17

Commerce & Industry

Insurance Company

$2,544 $2,000,000/$4,000,000 third-

party; storage tank liability -

$5,000 deductible

Business Travel

Accident

April 12, 2016-

17

Chubb Insurance

Company

$4,018 $250,000 Class I; $100,000

Class II;

$25,000 Class III; $10,000

Class IV

Total Premium

$2,425,638

Current Annual Premium by Policy

$849,683

$210,000

$10,143

$301,345

$428,370

$148,000

$4,514

$450,000

$11,721 $5,300 $4,018 $2,544 $0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000


Go Forward Program – Coverage & Premium Summary

Policy Policy Term Insurance Company Estimated Annual Premium

Limits and Deductibles

Property & Business Income Policy

TBD TBD $315,000 $125,000,000 for property damage and business income with sublimits at specific locations; $100,000 deductible except 2% with a $4.4 million max at Tampa locations for losses from wind

Products and E&O Liability Coverage

TBD TBD $78,000 $10,000,000 per claim and aggregate; $100,000 retention - $76,000,000 estimated revenue

Commercial Automobile Coverage

TBD TBD $13,250 2 units - $1,000 deductibles; $1,000,000 auto liability

Excess Liability Coverage

TBD TBD $21,345 Excess auto, workers’ compensation, and foreign liability

Workers Compensation Coverage

TBD TBD $285,000 $32,822,800 total payroll 1.16 experience modifications; guaranteed cost program

General and Medical Professional Liability Coverage

TBD TBD $85,000 $10,000,000 per claim and aggregate; $100,000 medical professional retention;


$25,000 general & employee benefit retention

Fiduciary Liability TBD TBD $5,000 $3,000,000 fiduciary liability; $1,000,000 Crime

Excess Liability Coverage

TBD TBD $125,000 Excess of Products, E&O, general, and medical professional liability

Cargo Stock Throughput Coverage

TBD TBD $145,000 $10,000,000 transit; $57,000,000 Tampa locations; $1,000,000 unnamed locations; $100k deductible/$250k deductible for wind losses

Foreign Package TBD TBD $2,500 $1,000,000 foreign general, auto, and employer’s liability

Flood Coverage TBD FEMA $2,650 5800 Building Tampa - $500,000 building and contents

Flood Coverage TBD FEMA $2,650 5900 Building Tampa - $500,000 building and contents

Environmental Coverage

TBD TBD $2,544 $2,000,000/$4,000,000 Third Party Storage Tank Liability - $5,000 deductible

Business Travel Accident

TBD TBD $2,500 $250,000 Class I; $100,000 Class II; $25,000 Class III; $10,000 Class IV

Total Premium $1,085,439


Property and Business Income Coverage

Property Coverage Limit Deductible

Building Coverage $125,000,000 blanket limit for two (2) locations

$100,000 deductible except 2% with a $4.4 million max at Tampa locations for losses from wind

Business Personal Property Included above Above

Equipment Breakdown Included Above

Business Income, Extra Expense, Loss of Rents

Included above 72 hours

Extended Period of Business Income

180 days 180 days

Earthquake and Flood $50,000,000 $500,000 flood and quake $1,250 deductible on FEMA Flood policies

Electronic Data Processing Equipment

Included Above

Service Interruption $15,000,000 property damage and business income

72 hours

Cause of Loss Form Special – Provides coverage against All Risk of direct physical loss or damage, except those perils that are specifically excluded in the policy

Valuation Replacement Cost for Property Actual Loss Sustained for Business Income


Coverage Terms

Policy Limits

Coverage amounts for building, machinery, and office contents are estimates based on appraisals and policy

information in the data room.

Coverage amount for Business Income and Extra Expense is estimated based on loss control reports and

income worksheets in the data room.

We are unable to determine if there are exposures at location other than those in Tampa, Florida.

We recommend maintaining the flood coverage through FEMA. The policies help to offset the deductible

portion of the other property coverage.

Underwriting Considerations

We expect that the current carrier will agree to continue to provide coverage for the locations occupied by the

therapy operation.

With a significant concentration of exposure in Florida, the underwriters will be concerned with the risk of a

catastrophic windstorm loss. We expect that the total cost of coverage will increase.

There may be a benefit to combining the coverage with the abc Company program.


General, Environmental, Products, Errors & Omissions, and Medical Professional Liability Coverage

Primary and Excess Coverage Limits

General Aggregate Limit $25,000,000

Per Location Aggregate Yes

Products/Completed Operations Aggregate Limit

$25,000,000

Personal/Advertising Injury Limit $25,000,000

Retention $100,000/$1,000,000 aggregate $25,000 for general and employee benefits liability

Coverage Trigger Claims Made – Retro Inception

Defense Coverage Included in limit

Employee Benefits Liability $1,000,000 occurrence $3,000,000 aggregate

Environmental Coverage $2,000,000/$4,000,000

Additional Items

Product Withdrawal and Recall Primary non-contributory

Audit Buffer – Final sales amount within a range will not generate an additional charge

Notice, Knowledge of Occurrence/Unintentional E&O

Incident Reporting TPA used for Losses within the Retention


Coverage Terms

Policy Terms

We have included Errors & Omissions coverage in the going forward program. We recommend that you

consider if there is an exposure for the therapy business or if this coverage applied to the part of ABC’s

operation that is not included in this transaction. The E&O benefit covers claims for performance failure if

services are being provided for a fee.

We have included Medical Professional liability coverage in the going forward program. We recommend that

you consider if there is an exposure for the therapy business or if this coverage applied to the part of ABC’s

operation that is not included in this transaction.

Broader policy forms may be available as they relate to the items below, and a full market study is

recommended:

o Definition of damages

o Coverage for clinical trials

o Insured vs. insured exclusion

o Claim notification

o Scope of E&O coverage

o Extended liability provisions

We recommend maintaining the Environmental coverage.


We expect that the current carrier will agree to continue providing coverage for the therapy operation.

Broader coverage forms may be available. We recommend that other underwriters and carriers are

considered.

There may be a benefit to combining the coverage with the ABC Company program.

The carrier loss runs showed many reported incidents but no significant payouts for the therapy operation.


Workers Compensation Coverage

Employers Liability Insurance

Bodily Injury by Accident $1,000,000 – Each Accident

Bodily Injury by Disease $1,000,000 – Policy Limit

Bodily Injury by Disease $1,000,000 – Each Employee

State Class Code Class Code Description Payroll Estimate Rate

Florida 4825

8742

8810

8832

Drug Manufacturing

Sales

Clerical

Dentists & Clerical

$8,142,950

$761,615

$8,619,279

$15,051,921

$1.91

$.49

$.25

$.44

Experience Modification

1.16

Total Premium $285,000

Coverage Terms

Policy Terms

Verify that the payrolls and classifications are accurate. We are uncertain as to why the “Dental” classification

is included.

We were uncertain based on the information provided if the therapy operation has employees in any states

other than Florida. We recommend utilizing a national carrier that can provide coverage in any location.

We recommend that you consider a “loss sensitive” workers’ compensation program. The carrier will pay a

dividend based on the ratio of losses to the final premium. The program has the potential of significantly

reducing the cost for coverage.


We expect that the current carrier will agree to continue to provide coverage for the therapy operation.

The loss runs indicate that there are meaningful hazards in the operation. In the recent past there have been

three severe losses. We recommend that an effective loss control program is needed to manage the

frequency and severity of losses.



While there have been some adverse loss experience in the last several years, the worst year (2012–13) will

drop out of the rating period on the next renewal. The benefit is that the experience factor will likely decrease

and create a proportionate reduction in the total compensation premium.

Workers’ Compensation Losses

Loss Date Policy Term

Carrier Location & Description Total Incurred

10/22/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Employee was Assembling Centrifuges. Group Leader

$284

10/16/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Performing Training In Chemistry Lab A

$312

8/22/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Employee was Pulling an Equipment Cart. W/Manufacturing Tech

$871

6/1/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Employee was Exiting Hall Corridor/Stairs/Plasma Facilities

$1,668

4/14/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Strain Lower Back - Fell From Chair

$4,794

3/6/2015 12/4/14 - 12/4/15

Hartford Tampa, FL/Irritation Left Arm - Liquid Glassware Bin. Associate Scientist

$305

12/14/2015 Total: $8,234

11/13/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Forehead Struck Box. Storage/Lab Assistant I

$331

10/27/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Ankle Slipped on Wet Stairs. Senior Materials Associate

$753

10/15/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Right Hand, Right Elbow - Closing Back Door. Materials Tech

$1,464

7/30/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Right Leg - Pump Dropped. Operator

$691

7/15/2014 12/4/13 - 12/4/14

Hartford Tampa FL/Injured Lower Back, Right Hip Lift - Moving Box. Executive

$67,840

7/15/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Lower Back, Right Hip Lift - Moving Box. Executive Assistant

$63,581

6/16/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Lower Back - Fell on Wet Floor. Quality Control Analyst

$1,176

6/13/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Strain Upper Back - Opening Boxes. Analytics

$2,439

2/25/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Injured Head – Stacked Boxes Fell. Maintenance Helper

$187




1/3/2014 12/4/13 - 12/4/14

Hartford Tampa, FL/Burn Right Wrist - Using Mouse. Senior Quality Control Specialist

$497

12/4/2014 Total: $138,959

12/5/2013 12/4/13 - 12/4/14

Hartford Tampa, FL/Unknown Injury Back - Fell. Senior Materials Tech

$772,609

12/5/2013 12/4/13 - 12/4/14

Hartford Tampa, FL/Unknown Injury Back - Fell. Senior Materials Tech

$765,557

8/30/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Strain Back, Neck - Lift Heavy Box. Quality Control Lab Support Tech

$94,370

8/30/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Strain Back, Neck - Lift Heavy Box. Quality Control Lab Support Tech

$90,527

8/14/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Cut Left Finger/Right Thumb - Broken Bottle. Quality Control Analyst

$532

6/20/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Pain Right Elbow Unknown Cause. Junior Manufacturing Tech

$3,267

6/3/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Burn Right Forearm – Tightening Steam Line. Tech Lab Manufacturing

$100

6/2/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Unknown Injury Right Eye/Cheek - Acid Splashed. Maintenance Supervisor

$401

5/28/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Unknown Injury. Senior Engineer

$100

4/22/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Unknown Injury Left Wrist/Hand - Slipped & Fell. Manufacturing Tech

$1,340

4/21/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Bending Finger - Glove Got Caught In Mixer. Manufacturing Tech 1

$6,251

2/16/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Pain Finger - Loosening Centrifuge with Hand Clamp. Manufacturing Tech 2

$259

2/14/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Broken Left Finger - Catching Basketball. Technical

$953




1/30/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Rash Injury Body System - Bitten by Bugs. Research & Development

$135

1/10/2013 12/4/12 - 12/4/13

Hartford Tampa, FL/Unknown Injury - Finger Accidently Closed in Door. Manufacturing Tech I

$856

12/4/2013 Total: $1,737,057

12/20/2012 12/4/12 - 12/4/13

Hartford Tampa, FL/Unknown Injury Right Leg, Foot - Container Tilted. Manufacturing Tech

$342

12/14/2012 12/4/12 - 12/4/13

Hartford Tampa, FL/Puncture Left Thumb by Shard of Glass. Biomedical Tech

$3,444

9/26/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Dizziness and Headache - Body System/Head Bent. Manufacturing Tech

$3,418

9/25/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Strained Lower Back Lifting Pallet Tank

$712

9/20/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Laceration Finger Caught Between Van & Motor. Senior Facility Operator

$919

9/11/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Pain Lower Back Stretching to Reach. Materials Technician

$100

8/27/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Pain Knee - Kneeling During Cleaning. Manufacturing Tech

$338

8/16/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Unknown Injury Right Foot Broken - Sample Splashed

$958

6/13/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Laceration - Forehead Hit Probe Holder. Manufacturing.

$1,798

6/9/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Sprained Right Shoulder. Slipped and fell on Wet Floor. Lab Assistant

$419

5/14/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Cut Right Ankle/Heel - Freezer Door Closed. Bio Medical Tech

$1,037

5/9/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Strain Left Shoulder - Slipped on Wet Floor. Senior Group Leader

$1,119

2/13/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Unknown Injury Face $247




1/14/2012 12/4/11 - 12/4/12

Hartford Tampa, FL/Strained Left Wrist - Moving Equipment. Facility Operator

$1,659

12/4/2012 Total: $16,410

Grand Total: $1,900,660

Workers’ Compensation Losses

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

2012 2013 2014 2015

US Corporation Losses for Florida Location

US Corporation Losses for Florida Location


Cargo Stock Throughput Policy

Coverage Limits

Transit $10,000,000

Inventory $47,000,000 Tampa

Deductibles $100,000 transit and warehouse

Catastrophe Deductible $250,000 windstorm, quake, and flood

Unnamed Locations $1,000,000

Exhibition or Trade Show $50,000

Messenger or Registered Mail $10,000

War $10,000,000

Flood Excluded in 100 Year Flood Zone $1,000,000

Coverage Terms

Policy Limits

Coverage amounts are based on the current policy.

Values should be verified based on actual exposures. We are uncertain if the international transit coverage is

required for the therapy operation or the part of ABC’s business that is not included in the transaction.


If a significant transit exposure does not exist, it may be more effective to add coverage for the inventory onto

the property program.

With a significant concentration of exposure in Florida, the underwriters will be concerned with the risk of a

catastrophe windstorm loss. We expect that the cost of coverage per $1,000,000 will increase.



Health & Benefits Diligence - Key Findings

Health & Benefits Plans

Medical/Rx, Dental, Vision, FSA, Life, AD&D,

STD, LTD

Voluntary Worksite Plans

The following costs are based on ABC’s 2017

projected costs, based on ABC’s projected

enrollment of 703 employees; it is not prudent to

assume that these average costs translate to the

smaller ABC Company plan based in New Jersey.

The gross cost of the Medical, Dental, Vision,

Basic Life/AD&D, STD, Core LTD plans is

estimated to be $4,182,077 per annum based on

the ABC 2017 projected average per employee

costs. A census of affected employees is not

available, costs assume 350 full-time

employees.

Employees contribute an estimated 20% or

$828,678 towards the cost of these Medical,

Dental, Vision, Basic Life/AD&D, STD, Core LTD

plans. ABC’s net annual cost for Health and

Welfare benefits is approximately $3,353,399.

As an Applicable Large Employer, the ABC is

subject to the Affordable Care Act (“ACA”). The

current medical plan design and contributions

strategy appear to meet the ACA requirements

of minimum value and affordable coverage.

The current ABC Medical/Rx and Dental plans

are self-funded. Run-out claims (claims incurred

before the transaction date but paid post-close)

are the responsibility of ABC. There should be

no risk of unfunded liabilities. Cherry Bekaert

Benefits Consulting recommends the purchase

agreement be reviewed to confirm there is no

run-out liability assigned to ABC Company.

Benefits are offered to full-time employees

working 30 hours or more per week following a

90-day new hire waiting period. Dependent

children are covered to age 26. ABC provides

coverage for same and opposite sex Domestic

Partners. ABC indicates that they calculate

Imputed Income for the cost of Domestic Partner

costs, which is appropriate.

The Life and Disability, Vision plan and other

voluntary plans such as Long Term Care,

Hospital Indemnity, Critical Illness and Accident

Insurance are fully insured. The fully-insured

plans have no risk of unfunded liabilities. If there

is an affected employee not at work on the date

of transaction (due to an approved leave of

absence, sick day or disability) the individual is

at risk of losing their employer-based life

insurance if they haven’t been approved for

Conversion or Waiver of Premium.

The healthcare FSA maximum of $2,600, the

$500 roll-over and the dependent care FSA limit

of $5,000 are all in line with IRS limits. ABC

employees may lose their FSA balances upon

termination of employment. FSA COBRA may

need to be offered by ABC in certain instances.

There are voluntary benefit plans that are fully

employee-paid: Long Term Care, Hospital

Indemnity, Critical Illness, and Accident

Insurance. These voluntary plans are typically

offered on a fully-portable basis allowing

individuals to continue coverage on a direct-pay

basis without a change to the cost or coverage.

Other voluntary insurance such as Pet, Auto,

and Renters/Homeowners are also offered.

The overall benefits package is in line with or

more generous than benchmarks. The outlier in

the benefits package is the absence of an HSA-

Qualified High Deductible Health Plan with an

employer contribution to a Health Savings

Account

(“HSA”). With the company’s anticipated growth,

we suggest a closer review of the benefit

programs and the appetite for popular tax-

advantaged programs such as an HSA.


Health & Benefits Diligence – Recommendations

Health & Benefits Plans

WXYZ costs and benefits have not been

provided for review or analysis. The current

provider of benefits for ABC Company is ADP

TotalSource through a PEO or co-employer

arrangement. The increased number of

employees as a result of the proposed

transaction with ABC is likely to result in a

revamp to WXYZ’s agreement with ADP

including the possibility of underwriting and

increased costs associated with ADP’s current

offering. The costs of ADP TotalSource’s PEO

do not typically scale in proportion to employer

size.

CBBC recommends a thorough cost analysis

and benefit comparison of WXYZ with the plans

of ABC in conjunction with a review of

benchmarks.

The detailed analysis will include a

recommendation of target plan designs and

funding arrangements. Subsequently, a full

market analysis and negotiation of all costs

associated with a benefits package for all WXYZ

employees is warranted.

Assess the current participation and uptake in

voluntary plans to determine the employee and

employer appetite for these arrangements going

forward.

Assess the appetite for providing Domestic

Partner coverage in light of the Federal

legislation allowing same-sex marriage and the

administrative burden of handling employee and

employer contributions for Domestic Partners.

Consider an Active Enrollment including a

communication campaign to engage employees

on the new benefit package and address

transitional disruption and issues.


Retirement Plan Diligence – Key Findings

Retirement Plans

401(k) and Profit Sharing Plan

ABC currently maintains a qualified 401(k) plan,

the ABC Company Savings & Retirement Plan

(the "401(k) Plan") on behalf of its eligible

employees.

With the expectation that this transaction is an

asset purchase, post-close the participation of

ABC Company employees (including the

withholding of participant elective deferral

contributions and loan payments) in the 401(k)

Plan will cease.

WXYZ will need to decide if all targeted

employees will be brought into the WXYZ 401(k)

Profit Sharing Plan or if a new 401(k) plan will be

set up for these employees. All ramifications on

Safe Harbor status and associated costs should

be considered.

Safe Harbor employer matching contributions

are made into the 401(k) Plan. The employer

matching contribution formula is 100% of

employee 401(k) contributions on the first 4% of

compensation contributed. We were not

provided with census data related to the targeted

employees so we were unable to determine

estimated costs.

Our review has not identified any material

compliance issues or concerns.


Executive Compensation Plans – Key Findings

Executive Compensation Plans

Long-Term Incentive Plan (LTIP)

Although we have not seen the purchase

agreement, our understanding is that the

proposed transaction is an asset purchase.

Therefore, the buyer will be assuming no

employee liabilities. We expect the PSA to

stipulate specifically that no employee liabilities

are being assumed. Nonetheless, in projecting

the future costs of running the business and in

making employment offers to those employees it

wishes to retain, the buyer should understand

the pay arrangements for current employees.

No information has been provided regarding:

o Base Salary

o Annual Bonus

o Equity Compensation

ABC operates a Long-Term Incentive Plan.

Under the terms of the Plan, participants are

granted share units. At the conclusion of a three-

year performance period, participants are

eligible for a cash payment based on the

average EBIT and relative share price

performance of the parent company (ABC) over

the period. Participants whose employment is

terminated prior to the end of the performance

period for any reason other than death, disability

or retirement, forfeit the units and are ineligible

for any cash payment.

Grants have been made each year since at least

2013:

o 2016: 36 participants




No information was provided regarding the

potential or actual value of these awards or the

liability associated with them.

Severance and Paid Time Off – Key Findings


Severance and Paid Time Off Plans The Company provides the following severance

benefits:

For hourly and part-time employees: 6 weeks +

1 week per year of service - maximum 10

weeks.

For salaried employees below Director: 6 weeks

+ 1 week per year of service - maximum 18

weeks.

For Senior Directors, Directors and Vice

Presidents: 6 weeks + 1 week per year of

service - maximum 22 weeks.

For Vice Presidents: 10 weeks + 1 week per

year of service - maximum 28 weeks.

Without an employee census of the affected

employees, we cannot evaluate the cost.

The Company operates a Paid Time Off policy under

which PTO days accrue based on years of service:

Non-exempt employees accrue 80–264 hours

depending on length of service.

Exempt employees accrue 144–264 hours

depending on length of service.

All full-time employees are eligible for three (3)

floating holidays.

Without an employee census of the affected

employees, we cannot evaluate the cost.


Appendix

Health & Benefits Diligence – Tables

Table 1: Gross and Net Cost (illustratively assumes 350 full-time employees)

ABC Company Medical Dental Vision Life/AD&D STD LTD Total

Provider BCBSFL Cigna EyeMed Cigna Cigna Cigna

Funding Mechanism

Self-Insured

Self-Insured

Fully Insured

Fully Insured

Fully Insured

Fully Insured

Annual Cost: Company PEPY

$8,337 $403 $0 $380 $228 $234 $9,581

Annual Cost: Total PEPY

$10,279 $703 $125 $380 $228 $234 $11,949

Total Enrolled Employees (Illustrative)

350 350 350 350 350 350 350

Annual Cost: Company

$2,917,886 $141,160 $0 $132,907 $79,692 $81,755 $3,353,399

Annual Cost: Total

$3,597,709 $246,103 $43,911 $132,907 $79,692 $81,755 $4,182,077

Average Annual Employee Contribution

$1,942 $300 $125 $0 $0 $0 $2,368


Table 2: Medical & Pharmacy Rates

Enhanced Monthly EE Contribution Monthly ER Contribution Monthly Premium

EE Only $108.40 $423.40 $531.80

EE + Spouse $295.80 $931.05 $1,226.85

EE + Child(ren) $283.38 $863.40 $1,146.78

EE + Family $377.74 $1,408.52 $1,786.26

Basic Monthly EE Contribution Monthly ER Contribution Monthly Premium

EE Only $63.95 $388.08 $452.03

EE + Spouse $212.59 $830.23 $1,042.82

EE + Child(ren) $203.81 $770.96 $974.77

EE + Family $287.56 $1,230.76 $1,518.32

Value Monthly EE Contribution Monthly ER Contribution Monthly Premium

EE Only $5.14 $393.71 $398.85

EE + Spouse $136.29 $783.85 $920.14

EE + Child(ren) $128.54 $731.55 $860.09

EE + Family $202.04 $1,137.65 $1,339.69

Table 3: Dental Rates

ABC Company Monthly EE Contribution Monthly ER Contribution Monthly Premium

EE Only $12.52 $17.91 $30.43

EE + Spouse $29.50 $46.72 $76.22

EE + Child(ren) $28.79 $42.15 $70.94

EE + Family $44.26 $69.28 $113.54

Table 4: Vision Rates

ABC Company Monthly EE Contribution Monthly ER Contribution Monthly Premium

EE Only $5.35 $0 $5.35

EE + Spouse $10.16 $0 $10.16

EE + Child(ren) $10.64 $0 $10.64

EE + Family $15.67 $0 $15.67


Table 5: Life & Disability Rates

ABC Company Rates/Cost

Life Volume Rate/$1000

Not Provided 0.100

AD&D Volume Rate/$1000

Not Provided 0.010

STD Volume Rate/$10

Not Provided 0.270

LTD Core Volume Rate/$100

Not Provided 0.390

LTD – Buy-Up Volume Rate/$100

Not Provided 0.266

Voluntary Life/AD&D Volume Rate/$100

Not Provided Age-Banded

Table 6: Medical & Pharmacy Benefits

Medical/Rx (BCBSFL PPO)

Enhanced Basic Value

In-Network

Out-Network

In-Network

Out-Network

In-Network

Out-Network

Annual Deductible: Single

$500 $1,500 $1,500 $3,000 $3,500 $6,000

Annual Deductible: Family

$1,000 $4,500 $3,000 $9,000 $6,000 $12,000

Medical Out-of-Pocket Max: Single

$1,500 $4,000 $3,000 $6,000 $3,500 $6,000

Medical Out-of-Pocket Max: Family

$3,000 $8,000 $6,000 $12,000 $6,000 $12,000

Coinsurance 20% 40% 20% 40% 20% 30%

Office Visits - Primary

$20 Copay Deductibe/ Coinsurance

$25 Copay Ded./Coins.



Office Visits – Specialist




Preventive Care No Charge Ded./Coins.

No Charge Ded./Coins.

No Charge Ded./Coins.

Hospital Ded./Coins.

Ded./Coins.

Ded./Coins.

Ded./Coins.

Ded./Coins.

Ded./Coins.

Rx-Generic / Formulary / Non-Formulary / Specialty

$10 / $30 / $50 / $80

Not Covered

$10 / $30 / $50 / $90

Not Covered

$10 / $30 / $50 / $90

Not Covered

Table 7: Dental PPO Benefits

Dental (Cigna PPO) DenteMax PPO

In-Network Out-Network

Annual Deductible: Per Person Not Provided Not Provided

Annual Deductible: Per Family Not Provided Not Provided

Annual Maximum $1,500 $1,500

Coinsurance:

Preventive (Type 1) 0% 0%

Basic (Type 2) Not Provided Not Provided

Major (Type 3) Not Provided Not Provided

Orthodontia (Type 4) Not Provided Not Provided

Orthodontia Lifetime Maximum $3,000 $3,000

Table 8: Vision PPO Benefits

Vision (EyeMed PPO) Vision Plan

Plan Frequency Exams / 12 months; Lenses / 12 months ; Materials / 24 months

Exam $10 Copay

Materials $25 Copay

Table 9: Life/AD&D & Disability Benefits

Life/AD&D Insurance (Cigna) Full-Time Employees

Contribution Non-Contributory (Employer-Paid)


Maximum Benefit 4x salary up to $300,000 (hourly based on 2,080 hours)

Age Reduction (by) 65% at 65, 40% at 70, 25% at 75

Voluntary Life/AD&D (Cigna) Full-Time Employees

Contribution Voluntary (Employee-Paid)

Employee Supplemental Life $10,000 increments up to $500,000

Employee Guarantee Issue $200,000

Spouse Life $5,000 up to $250,000 ($30,000 guaranteed issue)

Child Life (6 months to 19/23) $10,000

Short Term Disability (Cigna) Full-Time Employees

Contribution Non-Contributory (Employer-Paid)

Income Replacement 66.67%

Duration 12 Weeks

Elimination Period 7 days accident / 7 days injury

Class Hourly

Weekly Benefit $1,000/week maximum

Class Salaried

Weekly Benefit $3,000/week maximum

Long Term Disability (Cigna) Full-Time Employees

Contribution Non-Contributory

Income Replacement 60%

Elimination Period 90 Days

Pre-Existing Condition Limitation 12 months prior / 12 months insured

Definition of Disability 24 months Own Occupation

Maximum Duration SSNRA Salaried / Age 65 Hourly

Class Hourly

Monthly Benefit $3,000

Class Salaried

Monthly Benefit $10,000

Buy-Up LTD (Employee-Paid) 66.67% up to $15,000 (salaried), 66.67% $4,000 (hourly)


Retirement Plan Diligence – Details

ABC currently maintains a qualified 401(k) plan, the ABC Company Savings & Retirement Plan (the "401(k)

Plan") on behalf of its eligible employees.

With the expectation that this transaction is an asset purchase, post-close the participation of ABC employees

(including the withholding of participant elective deferral contributions and loan payments) in the 401(k) Plan

will cease.

WXYZ will need to decide if all targeted employees will be brought into the WXYZ 401(k) Profit Sharing Plan

or if a new 401(k) plan will be set up for these employees. All ramifications on Safe Harbor status and

associated costs should be considered.

Employees will need to enroll in the WXYZ or a new 401(k) plan to make contribution elections, investment

elections and beneficiary designations. Employees will be able to rollover account balances from the 401(k)

Plan to the WXYZ or to a new 401(k) plan.

The 401(k) Plan was initially adopted in 2007. The 401(k) Plan utilizes MassMutual as record-keeper and

investment custodian.

Full-time employees are eligible to participate in the 401(k) Plan with the first payroll period following

achieving 90 days of service with the company. Part-time employees are eligible to participate in the 401(k)

Plan with the first payroll period following achieving 1,000 hours of service over a one-year period.

For 2016, employee pre-tax and Roth 401(k) contributions of up to the IRS limit of $18,000 can be

contributed. Participants who attain age 50 by year end can make an additional $6,000 in catch-up

contributions.

Safe Harbor employer matching contributions are made into the 401(k) Plan. The employer matching

contribution formula is 100% of employee 401(k) contributions on the first 4% of compensation contributed.

An annual notice is required to be distributed to participants towards the end of each year informing them that

the Safe Harbor contribution will be made for an upcoming plan year. This contribution allows the 401(k) Plan

to avoid the Actual Deferral Percentage and Actual Contribution Percentage tests. Safe Harbor employer

matching contributions are immediately fully vested to employees.

The 401(k) Plan allows for discretionary non-elective employer profit sharing contributions, but it does not

appear that profit sharing contributions are being made.

The 401(k) Plan allows participants to borrow loans from their account. The 401(k) Plan should be amended

prior to plan termination to allow for rollovers of outstanding loans post-close.

Our review has not identified any material compliance issues or concerns.

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