employee benefits due diligence: project alpha (abc company) · due diligence: project alpha (abc...
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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.
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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.
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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.
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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
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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
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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;
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$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
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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
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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.
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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
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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.
Underwriting Considerations
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.
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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.
Underwriting Considerations
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.
There may be a benefit to combining the coverage with the ABC Company program.
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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
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Loss Date Policy Term
Carrier Location & Description Total Incurred
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
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Loss Date Policy Term
Carrier Location & Description Total Incurred
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
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Loss Date Policy Term
Carrier Location & Description Total Incurred
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
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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.
Underwriting Considerations
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.
There may be a benefit to combining the coverage with the ABC Company program.
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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.
cherrybekaertbenefits.com 19
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.
cherrybekaertbenefits.com 20
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.
cherrybekaertbenefits.com 21
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
o 2015: 23 participants
o 2014: 17 participants
o 2013: 14 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
cherrybekaertbenefits.com 22
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.
cherrybekaertbenefits.com 23
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
cherrybekaertbenefits.com 24
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
cherrybekaertbenefits.com 25
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.
$25 Copay Ded./Coins.
cherrybekaertbenefits.com 26
Office Visits – Specialist
$35 Copay Ded./Coins.
$45 Copay Ded./Coins.
$45 Copay Ded./Coins.
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)
cherrybekaertbenefits.com 27
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)
cherrybekaertbenefits.com 28
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.