In a corporate merger or acquisition, the ongoing treatment of both the seller’s and buyer’s retirement plans come into question, so it’s crucial to understand how different types of business transactions can impact both plans.

If left unaddressed prior to close, many benefit issues could result in either ruining the deal or creating untold compliance issues and/or financial liability after the deal is complete. When undergoing a merger or acquisition, it is imperative for plan fiduciaries to understand their 401(k) options in this significant legal transaction.

Types of Business Transactions

Asset Purchase  – Acquisition of particular assets and liabilities of an entity. The buyer can pick and choose the assets and liabilities they wish to acquire. There are generally three options for dealing with a 401(k) plan in an asset purchase.

1. Buyer acquires the seller’s plan – if the buyer desires to continue the plan as is or merge the plan into their plan.
2. Buyer does not acquire seller’s plan, and establishes a new, clone of the seller’s plan instead.
3. Buyer does not acquire the seller’s plan, and integrates the seller’s employees into their plan.

NOTE: The buyer’s plan (either a new clone or existing plan) can accept a transfer of assets and liabilities from the seller’s plan attributable to the employees acquired as part of the asset deal, but this is not required.

Stock Purchase – Acquisition of the value of the equity interest in the entity (all assets and liabilities). The buyer becomes responsible for the plan maintained by the seller prior to the transaction. There are generally two options for handling the 401(k) in a stock purchase.

1. Acquire the seller’s plan and either:
   1. Continue the acquired seller’s plan as is – full liability
   2. Freeze the seller’s plan – minimize liability
   3. Merge the seller’s plan into the buyer’s plan – full liability and possibility of tainting their own plan
2. Terminate the seller’s plan prior to closing of the acquisition and distribute benefits – avoid liability

Basic Options for the Acquired Plan

Continue the Acquired Plan

This is the least disruptive option for employees, as there is no change in investment options or recordkeeper website login, and no impact on outstanding loans. The acquired plan is considered part of the buyer’s controlled group for coverage and nondiscrimination testing, and the buyer assumes all liabilities associated with maintaining the plan. This could result in duplicative efforts or slightly greater administrative burden.

Terminate the Seller’s Plan Prior to Closing

This is the most common option when the buyer will provide it’s own plan to the soon-to-be-acquired employees. By terminating the seller’s plan prior to closing, the buyer can help avoid acquisition of additional risk and unexpected liabilities. However, this is considered a distributable event for participants, and 100% vesting is required in the seller’s plan.

Freeze the Acquired Plan

Freezing the seller’s plan is typical when the acquisition has already closed without prior plan termination and with no due diligence of the seller plan conducted; or it is typical when the plan was inadvertently acquired and the buyer wants the new employees to participate in the their plan. Typically, the buyer will merge the seller’s plan into their plan at a later date, after a post-closing due diligence review is conducted. When freezing the buyer’s plan after close, the seller must be careful to continue satisfying ERISA and all other legal and regulatory requirements. The buyer acquires all potential risk and liability. This is only semi-disruptive to participants as they may now have two plans.

Key Takeaways

• There are significantly more options prior to the close of transactions than after, so it is imperative to consult with your 401(k) advisor PRIOR to closing.
• Unforeseen liabilities can be costly for plan sponsors.
• Intensive due diligence prior to acquisition is a necessity.
• Fiduciary duties must always remain a key consideration!

Advisory Services offered through The Ascent Group, LLC, an SEC-registered investment adviser. Securities offered through Triad Advisors, LLC, Member FINRA/SIPC. The Ascent Group, LLC; Alera Group, Inc.; Summit Group of Virginia, an Alera Group Company; and Summit Group 401(k) Consulting, an Alera Group Company, are not affiliated with Triad Advisors, LLC. Representatives do not provide tax or legal advice. Please consult with your tax advisor or attorney regarding your situation.