This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is the Florida M&A employee-benefits story founders almost never hear before signing the LOI. A strategic buyer signs to acquire a Florida-based services company with 180 employees, a self-insured medical plan through a national carrier, a 401(k) plan with a $6 million balance, a COBRA administrator on retainer, and no idea what an ACA affordability look-back is. The purchase agreement lands on the founder’s desk with a fifteen-page benefits schedule, a 401(k) termination resolution, an ERISA rep with a $1.5 million cap, and a series of pre-closing covenants nobody at the target has ever seen. The founder pushes back on the plan-termination piece because the CFO likes the current recordkeeper. Closing gets pushed two weeks. Post-closing, the buyer discovers the seller under-collected employee premiums for eleven months, blowing the ACA affordability safe harbor and creating a § 4980H(b) penalty exposure. The escrow gets tapped. The relationship sours. None of it was necessary.
Employee benefits diligence is the M&A workstream most Florida founders undervalue and most buyers underscope. It is not a compliance checklist. It is a live-fire audit of the target’s plan documents, plan operations, participant communications, controlled-group filings, and the last three years of run-out claims. When it is done well, it prices the deal correctly. When it is done poorly, the buyer inherits liabilities that sit outside the purchase price and outside the traditional rep-and-warranty framework.
ERISA § 3(3) sets the scope of what has to be looked at
ERISA § 3(3) defines an “employee benefit plan” to include both “employee welfare benefit plans” (medical, dental, vision, life, disability, severance) and “employee pension benefit plans” (401(k), pension, deferred compensation). Every one of those categories is a distinct diligence workstream with its own governing document, its own Form 5500 filing history, its own operational compliance record, and its own successor-liability profile. Florida deal counsel who treat the ERISA rep as a single check-the-box item are papering over five to seven separate diligence questions.
The Form 5500 filing history is the diligence starting point. It reveals plan participant counts, funding status, prohibited transactions self-reported on Schedule G, delinquent contributions, and audit reports for plans over 100 participants. A missing or late-filed 5500 is a $2,586 per day per plan DOL penalty exposure that survives closing and rides through to the buyer in a stock deal. The Delinquent Filer Voluntary Compliance Program caps that exposure at $1,500 or $4,000 per return, but the correction has to be filed before DOL initiates an audit.
COBRA obligations at closing are a Florida asset-deal trap
COBRA continuation coverage under Internal Revenue Code § 4980B and ERISA §§ 601 through 608 sits at the intersection of the two most-litigated M&A benefits questions: which entity is the “plan sponsor” after closing, and who has the obligation to offer COBRA to the seller’s terminated workforce. The IRS regulations at 26 CFR § 54.4980B-9 provide a bright-line rule for asset transactions. If the seller ceases to maintain any group health plan post-closing (typical in a full asset sale), the buyer that is a “successor employer” assumes the seller’s COBRA obligations for the M&A qualified beneficiaries. If the seller continues to maintain a group health plan, the seller keeps the obligation.
Most Florida asset-sale purchase agreements paper this backwards. The buyer refuses to assume “any benefits liabilities,” the seller assumes the reader will read that language literally, and neither side runs the successor-employer analysis under the Treasury regulations. Post-closing, a terminated seller-employee elects COBRA, the seller-shell has no plan to offer, and the buyer’s plan administrator gets a notice from the DOL. The purchase agreement language does not resolve the fight because the underlying obligation is regulatory, not contractual.
The notice-timing piece is the operational trap. Under the DOL regulations, the plan administrator has 14 days from receiving notice of a qualifying event to send the COBRA election notice, and the employer has 30 days to notify the plan administrator of certain qualifying events (44 days total, employer-to-participant). A closing that terminates 40 or 60 employees produces 40 or 60 simultaneous qualifying events. If the transition-services agreement does not name a specific administrator and give that administrator access to the seller’s payroll system, the notices go out late and the statutory penalties accrue at $110 per day per qualified beneficiary.
The ACA § 4980H look-back is where Florida service-industry deals get repriced
The Affordable Care Act employer mandate under IRC § 4980H imposes penalties on applicable large employers (50 or more full-time-equivalent employees, measured on a controlled-group basis) that fail to offer minimum essential coverage to 95 percent of full-time employees, or fail to offer coverage that is affordable and provides minimum value. The affordability safe harbors are three: the W-2 safe harbor, the rate-of-pay safe harbor, and the federal poverty line safe harbor. The 2026 affordability threshold is 9.02 percent of the applicable metric.
Florida service-industry targets — restaurant groups, staffing agencies, hospitality operators, home-health providers, distribution operations — live at the edge of the affordability threshold on every plan year. A one-percent premium increase, a change in the shift-differential math, or a mid-year change to the safe harbor election blows the threshold. The penalty under § 4980H(b) is $4,460 per year per employee who receives a premium tax credit on the exchange (2026 amount, indexed annually). On a target with 250 full-time employees, a single year of missed affordability, with 10 percent of the workforce on the exchange, is a $111,500 exposure — and the IRS three-year look-back means the buyer inherits three years of exposure at closing.
The diligence workstream is not glamorous. It is a review of the last three years of Forms 1094-C and 1095-C, a reconciliation of the safe-harbor codes reported on Line 16, a check of the affordability calculation for the lowest-cost self-only coverage, and a review of any IRS Letter 226-J assessment received by the target. Deal counsel who skip it are relying on an ERISA rep that will not cover an IRS assessment because the assessment is not an ERISA claim.
The 401(k) pre-closing termination question in a stock deal
In an asset deal, the buyer does not inherit the seller’s 401(k) plan. The plan stays with the seller and is either terminated or continued with the residual entity. In a stock deal, the buyer inherits the plan and, importantly, becomes a member of a post-closing controlled group with any other buyer-sponsored 401(k) plans. That controlled-group aggregation is the piece that drives the “terminate the target’s 401(k) before closing” recommendation on almost every stock transaction.
The reasoning: post-closing, the target’s 401(k) and the buyer’s 401(k) are treated as sponsored by a single employer for coverage testing under IRC § 410(b), nondiscrimination testing under § 401(a)(4), and top-heavy testing under § 416. Two plans with different eligibility, different match formulas, and different investment lineups do not naturally pass those tests. Terminating the target’s plan the business day before closing and rolling balances into the buyer’s plan post-closing under the successor-plan rules of § 401(k)(10) sidesteps the aggregation problem entirely.
The mechanic requires a board resolution before closing, a resolution ratified as a pre-closing covenant in the purchase agreement, a corresponding 100-percent vesting event (required on plan termination under § 411(d)(3)), and a coordinated participant communication. Miss any of those steps and the “termination” is not effective, the plans aggregate at closing, and the buyer inherits a controlled-group compliance problem that will surface at the next annual test.
Multiemployer withdrawal liability is the sleeper claim
Any Florida target with unionized labor, particularly in construction, hospitality, or distribution, may participate in a multiemployer pension plan governed by ERISA Title IV. Withdrawal from a multiemployer plan — which can be triggered by an asset sale, a stock sale, or a mere reduction in contribution base units — creates withdrawal liability under ERISA §§ 4201 through 4225. On a moderately underfunded plan, a mid-market employer’s withdrawal liability can run $2 million to $15 million.
ERISA § 4204 provides a bona fide asset-sale carve-out. If the buyer assumes the seller’s contribution obligation, posts a bond or escrow equal to the seller’s average annual contribution over the three prior plan years, and agrees to a five-year secondary liability window, the sale is not a “withdrawal” and the withdrawal-liability claim does not trigger. Missing the § 4204 election window collapses the carve-out. Diligence has to identify the multiemployer exposure at LOI, not at closing.
Section 280G and the rollover-equity intersection
Section 280G limits the deductibility of “excess parachute payments” and imposes a 20 percent excise tax on the recipient. On any change-of-control transaction with executive equity, deferred comp, or accelerated vesting, the 280G analysis has to run before signing. The interaction with the rollover-equity structure Florida buyers frequently use — where the target’s founders roll a portion of their proceeds into buyer equity — is where the analysis gets subtle. A rollover that is treated as a payment contingent on the change of control is a 280G payment. A rollover that is genuinely a re-investment on arm’s-length terms is arguably not. The characterization drives whether the 280G shareholder-vote cleansing procedure has to run, and Florida S-corp and pass-through targets have specific 280G-vote mechanics that differ from C-corp mechanics.
Florida-specific gnats around workers’ compensation assumption
Florida requires nearly every employer with four or more employees (one or more in construction) to carry workers’ compensation coverage under Chapter 440. In an asset deal, the buyer does not automatically inherit the seller’s workers’ comp policy. The buyer either binds new coverage effective at closing or elects to assume the seller’s policy through a “policy assumption endorsement.” The endorsement has premium and experience-modifier implications that flow into the buyer’s next three years of premium. Deal counsel who skip the workers’ comp piece at diligence hand the CFO an unpleasant surprise on the first renewal.
Where this fits in the Florida deal architecture
Employee benefits diligence is not the sexy piece of the deal, and that is exactly why it is where the money leaks. Every post-closing benefits dispute on a Florida M&A deal traces back to a diligence gap that was flagged at LOI and not resolved before signing. For the broader Florida M&A framework that surrounds this workstream, see the treatment at montague.law/business-law/m-a-mergers-and-acquisitions and the deal-term primer at seller-friendly-vs-buyer-friendly deal terms.
The Department of Labor’s plain-language COBRA resource at is a useful sanity-check on the notice timing, the qualified-beneficiary definitions, and the successor-employer mechanics. The Treasury regulations at 26 CFR § 54.4980B-9 are the operative text.
The pre-closing plan-termination question, the ACA look-back, the COBRA successor-employer piece, and the multiemployer withdrawal exposure are the four items that decide who eats the run-out claims on a Florida benefits deal. None of them are handled by a standard ERISA rep. All of them can be handled by a diligence workstream that starts at LOI.
If you are buying or selling a Florida target with a benefits stack that needs a real diligence look before signing, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
