Employee Benefit Plan Audit Risks Created by M&A Activity

ARTICLE | January 20, 2026

When companies pursue mergers and acquisitions, leadership teams typically focus on the headline numbers: purchase price, revenue synergies, and market positioning. Yet one critical area often receives minimal attention until it becomes a problem: employee benefit plan compliance. The reality is that M&A activity significantly increases employee benefit plan audit risk, and companies that overlook this exposure may face unexpected liabilities, compliance failures, and costly penalties.

The Documentation Challenge: Merger or Termination?

One of the most common issues auditors encounter post-M&A is fundamental confusion about what actually happened to the benefit plans. Plan sponsors frequently state they “merged” the plans when, in fact, they terminated one plan and enrolled participants in another. This distinction matters enormously from an audit and compliance perspective.

Benefit plan auditors require comprehensive documentation, including plan documents, amendments, and M&A transaction agreements, to verify the actual structure. Whether the transaction was structured as a stock purchase or an asset purchase drives different compliance requirements. In stock purchases, the acquiring company assumes all liabilities of the seller’s plans, including past and future obligations. Asset purchases typically provide more flexibility, but this structure comes with its own compliance complexities.

The stakes are particularly high given recent IRS enforcement activity. Since 2017, Applicable Large Employers have received IRS Letter 226J notices for Affordable Care Act violations, with penalties ranging from tens of thousands to millions of dollars. Given that it took the IRS two years to notify companies of Pay-or-Play violations, acquiring companies may inherit penalties that the seller doesn’t even know exist yet. Without thorough due diligence, these hidden liabilities can surface long after the deal closes.

The Year-End Transfer Trap

Many plan sponsors prefer clean cutoffs and naturally gravitate toward December 31 as the date to merge or transfer plans. However, this timing frequently creates significant audit complications. Here’s what typically happens: one service provider liquidates the plan assets on December 31, but the funds don’t transfer to the new provider until the next business day in January.

The result? Auditors receive asset certifications from both providers showing zero plan assets at year-end. The money exists somewhere, but the documentation suggests otherwise. This scenario requires extensive back-and-forth communication to prove the assets were held in the liquidating provider’s general account awaiting transfer. To avoid this documentation nightmare, consider quarterly transfer dates (March 31, June 30, or September 30) instead of the congested year-end period.

Service Provider Changes and Participant-Level Accuracy

When M&A activity triggers a change in service providers, audit risk intensifies. Auditors must verify completeness and accuracy at two levels: the plan level and the participant level. Did all assets transfer correctly from one provider to another in total? More importantly, did each individual participant’s balance transfer accurately?

This participant-level verification becomes especially critical when plans merge rather than terminate. Certain benefits are protected by law and cannot be reduced or eliminated, including accrued benefits, early retirement benefits, favorable vesting schedules, and specific distribution options. If fund mapping isn’t handled properly, participants may find themselves in inappropriate investments. Forfeiture accounts from the acquired plan require careful analysis to determine how those assets can be used under the merged plan structure.

The Audit Threshold Issue

M&A transactions can unexpectedly push a combined plan over the 100-participant threshold, triggering the requirement for an independent audit. Companies that previously filed simplified Form 5500 returns for small plans may suddenly need a full audit with ERISA Section 103(a)(3)(c) certification. This requirement catches many organizations off guard, both from a cost and timeline perspective.

Additionally, companies operating both plans separately must understand the special M&A transition rules. While these rules allow separate non-discrimination testing for the transaction year and the following year, plans must be aggregated for testing starting in the third year. Many separate plans cannot satisfy testing rules independently and ultimately require merging, adding another layer of compliance complexity.

Proactive Planning Reduces Risk

The most effective way to minimize the impact of M&A activity on employee benefit plan audit risk is to involve your audit team early. Before finalizing transaction structures, engage with auditors who understand the proper reporting and disclosure requirements for both the IRS and the Department of Labor. These professionals can identify potential compliance issues during due diligence rather than after the deal closes.

Companies should also view the M&A transition as an opportunity to strengthen benefit plans through improved design features such as automatic enrollment, enhanced matching contributions, or better investment lineups. A well-executed communication strategy helps employees of the acquired company understand their new benefits and reduces the stress that often accompanies organizational change.

At Insero, our employee benefit plan audit specialists work proactively with clients navigating M&A transactions. We bring more than 50 years of experience helping growth-focused companies manage the complex compliance requirements surrounding benefit plan mergers, terminations, and transitions. Our team understands that details matter, documentation is essential, and early planning prevents costly surprises.

If your company is considering or currently managing an acquisition, don’t let employee benefit plans become an afterthought. Contact our team to ensure your transaction proceeds smoothly and your compliance obligations are met. We deliver solutions that inspire confidence, fueled by genuine care for your success.