Anybody who has ever gone through the merger and acquisition process can attest to just how difficult it can be to ensure a seamless transition. But as you dive into each planning stage, conduct the necessary meetings and plan for the flawless execution of each phase, don’t forget to consider how any existing retirement plans will be impacted. In fact, one of your first responsibilities should be to call your plan sponsor before any transaction occurs to ensure that your provider and sponsor have the time needed to help facilitate an optimal changeover.
Read Also: Parting Is Such Sweet Sorrow: But What About Your 401(k)?
The following are answers to some common retirement plan questions asked during the merger and acquisition process.
Why should retirement plan provisions be addressed in the purchase agreement?
A well-drafted purchase agreement will explicitly specify which parties will keep or assume sponsorship of retirement plans that cover employees of the purchased company. Omitting employee benefit provisions in the purchase agreement can have undesirable results. For example, in the case of an asset purchase, absent any provision that states otherwise, the seller’s retirement plan will remain with the selling entity and the seller will retain sponsorship of the plan. In the event of a share purchase, absent any provision, plans sponsored by the purchased business will be retained by the buyer. A more difficult situation arises when a plan sponsored by the purchased company covers employees not employed by the buyer or in the case where purchased company employees are covered by a plan not sponsored by the buyer. In these cases, the plan will generally need to be amended to exclude these employees. Amendments should occur before closing.
Will the type of sale affect my retirement plan options?
How the purchased company is acquired and merged into your company, such as whether it is bought through an asset purchase or stock purchase, is a critical consideration. In fact, one of the first questions your retirement plan provider will ask when you notify them of the transaction is the nature of the sale. This is because, even though every sale or purchase is different, some general rules will apply to these transactions.
In a stock sale, for example, you are planning to purchase the targeted company in its entirety. When this happens you will become the sponsor of the acquired company’s retirement plan. Of course, if your company and the company you are acquiring both have 401(k) plans, you will want to figure out how to proceed prior to a transaction taking place. For example, if you have no plans on keeping the seller’s retirement plan, this provision must be included in your purchase agreement.
An asset sale, on the other hand, may not have any of these considerations. Since you are purchasing select assets of the company, rather than the company in its entirety, the seller would maintain responsibility of the plan. That being said, there may be cases when an agreement may be reached to transfer retirement plan assets as well.
Can’t I just merge our retirement plans?
Another option often considered is the merger of the company’s 401(k) plans once the sale is finalized. The principal benefit to this option is that you will only be required to maintain one plan following the merger and that it will not be necessary to fully vest acquired company employees, which would be the case if you opted to simply terminate the acquired company’s plan. However, one of the largest impediments to merging plans is the requirement to preserve the anti-cutback rules designed to protect a participant’s accrued benefits offered under qualified retirement plans. If the plans being merged are defined contribution plans it may be necessary to issue a blackout notice because it is likely that a blackout will occur due to investment mapping from the target plan to the buyer plan.
What will happen to the benefits of acquired employees?
When employees are acquired during a sale, they typically continue working – only it will be you signing their checks. Because their employment was simply transferred, rather than severed, their years of services will transfer as well. These years will count toward eligibility and vesting credit under your plan.
By Angie Isakson, QKA (Dublin office)
Check out these articles for more retirement plan insight:
Avoid These Three Common Retirement Plan Mistakes
Retirement Plan Sponsors: Do You Know What You’re Paying For?