During the process of buying or selling a business, employers with retirement plans must decide whether to (1) merge the plans; (2) terminate one or more of the plans; or (3) maintain the plans separately. The specific circumstances of the merger or acquisition may determine which option is best for the employer. Legal requirements and the form of acquisition may limit the options as well.
Mergers and acquisitions can happen through one of two ways: as a stock sale or an asset sale. The decision as to which method is used fundamentally affects the consequences to the retirement plans. If the transaction is a stock sale, the buyer assumes all responsibility and liability for the plans currently sponsored by the seller, including both future and past obligations. Whereas the buyer in an asset sale generally has no responsibility for the seller’s plans.
In a stock sale, the new owners of the plan sponsor can make the decision to merge the plans after the sale. However, there must still be a written agreement to transfer or merge the assets of one plan into another.
In an asset sale, the plan is still sponsored by the original entity and owners. Part or all of the assets of the seller’s plan can be spun-off or merged into the buyer’s plan by written agreement of both the buyer and the seller.
Terminate the Acquired Company’s Plan
If the buyer in a stock acquisition does not want to assume ownership of the plan sponsor role, they must require the seller to terminate the plan prior to the date of sale. At a minimum, a resolution should be made to terminate the plan with an effective date prior to the transaction. Once the sale has gone through, the buyer is now in the role of the plan sponsor as owner of that entity. The buyer may be able to terminate the plan if they do not maintain a similar plan that would be considered a successor plan. However, if they maintain their own 401(k) plan, this would prevent them from terminating the acquired plan. Their only options would be to freeze the seller’s plan, merge it into their own, or continue the operation of the seller’s plan.
If the buyer in an asset acquisition does not wish to maintain the seller’s plan, the role of the plan sponsor does not move to the buyer, and the seller must determine what to do with the plan. The seller must realize that until they formally terminate the plan, distribute all plan assets, and file a final Form 5500, they are still responsible for all aspects of maintaining the plan. The seller has the responsibility to liquidate the plan and distribute all plan assets to participants. The buyer will often allow participants to roll over their account balances to the buyer’s plan, but generally loans are not permitted to be rolled over. As a result, participants with loans will likely incur a taxable distribution.
CONTINUE THE PLAN
Under a stock acquisition, the buyer can continue the plan as the new owner and plan sponsor. Nondiscrimination and coverage testing will apply and can be complicated if there are related entities following the transaction and other plans to consider. Typically, transition relief for coverage testing is available for the year of acquisition and the following year. The buyer will need to determine if the plans can be maintained separately, and if there are coverage issues due to different benefits, rights and features of each plan. The most important thing a buyer should know, if the seller has a plan, is the plan’s history. In a stock sale, the buyer becomes the plan sponsor and becomes fully liable for any prior plan errors.
Under an asset acquisition, should the buyer have no desire to assume the seller’s plan, the seller is still the plan sponsor and can opt to continue operation of the plan. As long as the seller continues to do business under the current entity they can continue the plan. Often, a significant number of employees depart along with an asset sale, whether it’s to go to work for the buyer or because the seller will not continue that portion of the business. This often results in a partial plan termination requiring all affected participants to become fully (100 percent) vested.
In a stock sale, if the sale results in a controlled or an affiliated service group situation, the historical records become imperative—since the newly acquired entity is now related to the buyer’s entity. If the buyer maintains the seller’s entity as a wholly owned subsidiary or brother-sister organization, those employees are likely not considered eligible to participate in the plan as currently written. Many documents are designed so that only the sponsoring organization is considered as participating in the plan. All other affiliated or related organizations must complete a participation or joinder agreement in order to participate in the plan. If the buyer decides not to continue the seller’s entity as a separate organization, closes it down and moves operations under its own umbrella, the employees brought over from the seller’s entity are now direct employees of the buyer, and prior service with the seller must be recognized.
In an asset sale, the companies remain unrelated. An employee brought over to the buyer’s entity is essentially hired as a new employee of the buyer. With no changes to the buyer’s plan, the employees from the seller are treated as any other new employee of the buyer and must meet the same eligibility requirements and start earning credit from the day of acquisition for vesting. If the goal is to provide the seller’s employees with credit for their prior service in the buyer’s plan, the plan must be amended.
Please call our office if you have any questions regarding the above topic.