Last year, 768 hospitals were involved in mergers, acquisitions or similar transactions. While news of such transactions usually focuses on the cost of the deals and the transition of power, little is said about the millions and sometimes billions of dollars tucked away in each hospital's pension plan.
For many for-profit hospital companies, operating a separate pension plan for each new hospital taken on can run up administrative bills. Plus, federal pension law bans for-profit defined contribution systems-usually 401(k) plans-from soaking up not-for-profit hospitals' plans, usually 403(b) plans.
For-profits want to do right by their newly acquired brethren because skimping on retirement benefits just isn't good human resources policy, says Michael Liang, partner and head of compensation and benefits for Steel, Hector & Davis in Miami.
Experts also say it's good policy to take whatever steps necessary to avoid confusion as hospitals transition to a new retirement plan.
Retirement plan managers for Brentwood, Tenn.-based Quorum Health Group and Santa Barbara, Calif.-based Tenet Healthcare Corp. say that while every acquisition has unique aspects, the not-for-profit hospital's 403(b) plan assets usually are frozen the day it is acquired. This means no new contributions can be made, but the plan still is managed and employees (if the plan permits) still are allowed to change investment options. Assets are distributed when employees become eligible.
The two types of plans are quite similar.
401(k) plans allow employees to make pretax contributions up to $9,500 for 1997. Employers often match a certain percentage of employees' contributions.
403(b) plans are exclusively for not-for-profit companies. They are considered individual accounts, just like an individual savings account. With 403(b) plans, employers buy annuities on behalf of each employee, who become vested after a defined amount of time.
Sometimes employers set up defined-benefit plans on top of the 403(b) to make contributions on behalf of the employee. Instead of being an individual account, defined-benefit plans are based on a formula that measures the participant's years of service and compensation.
Both Quorum and Tenet say that after the 403(b) plan assets are frozen, employees from the newly acquired hospital usually become part of their company's 401(k) plans. If the hospital has a defined-benefit plan, depending on the plan's situation and condition, benefits may be frozen or the plan may be terminated and the employer will buy annuities to pay the promised benefits.
After old benefits are met, employees become part of the for-profit's 401(k).
While every situation is different, the new employees usually get credited in the new system with the years of service they completed at the not-for-profit hospital. This way, employees won't have to start from scratch before they become vested in the for-profit's 401(k) plan.
Tom Senior, principal at the Kwasha Lipton Group in Fort Lee, N.J., says pushing a new plan on employees who are already skeptical of their new situation can be difficult.
"It's going to be viewed as negative even if it's a positive thing," Senior says.
While employees may be upset that their new employer is freezing or in some way terminating their plan, many might not understand that employers have the right to amend plans and the right not to offer one, Liang says. But in many cases, the benefits are better under the new plan.
That's why it's important that the for-profit company comes in early to explain to employees what's happening to their retirement plans, says Debra Andonie, director of retirement for Tenet.
Andonie says her company usually goes to the newly acquired hospital before the transaction is completed to make sure employees understand their new retirement plan options.
There's a lot of explaining to do because, for the first time, employees have more command of how their retirement assets are invested, says Katherine Buck, Quorum's director of corporate benefits. Quorum also helps employees understand not just the switch to a new employer but the new benefit plan and how employees now have more control over how their assets are invested, Buck says.
Tenet runs a similar education program to help employees become better investors.
"It's my impression overall that it's a positive change," Buck says. "Employees don't understand (not-for-profit retirement plans) and don't relate to them very well. With a 401(k), they're doing something. It's all employer/employee contributions, and they're well-informed and in control of what they have."
Both firms say high participation rates show their integration programs are successful.
Quorum boasts an 80% participation rate in its 401(k) plan for its 18,000 employees. The plan allows participants to defer 1% to 15% of their pretax pay to the plan. Employees choose from six investment options ranging from conservative money market accounts to more sophisticated international mutual funds. Quorum also matches up to 4% of the employees' contributions. Employees can make changes to their asset allocation once a quarter.
Meanwhile, Tenet has a 60% participation rate in its 401(k) plan for its 43,000 qualified employees. Tenet employees can defer 1% to 16% of their pretax pay and choose among 12 investment options. The company matches 50 cents for every $1 for the first 2% of income contributed, then $1 for every $1 to 3% of income. In January, the plan-one of the larger 401(k)s in the country, with nearly $1 billion in assets-will have 18 options, Andonie says.
Both Tenet and Quorum have a stock option plan, which allows employees to buy company stock at a discount. Neither company has a company stock investment option in its 401(k) plan.