What to do when merging 401k plans or merging pension plans
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Structure of the Transaction
When companies undergo mergers or acquisitions, it is important to consider the ramifications as they relate to the retirement plans. Will the companies be merging 401k plans or merging pension plans? The structure of the transaction drives its effect on any existing retirement plans. Generally, there are three types of transactions:
- Acquisition by stock
- Acquisition by purchase of assets
- Company merger
Acquisition by Stock
When a company is acquired by purchase of stock, the company acquired (referred to here as the target) remains intact with new ownership after the acquisition. Its employees typically continue to be employed by the target, and any existing retirement plan continues to be sponsored by the target. Generally speaking, the new shareholders of the target are now responsible for the assets and liabilities (including plan liabilities) of the target.
Acquisition by Purchase of Assets
When a company is acquired by purchase of assets (and sometimes assumption of liabilities), the target remains intact with the same ownership after the acquisition, but it no longer has assets, excluding those not purchased, and cash (or whatever it received for the sale of its assets). The target’s employees are typically no longer employed by the target, and may or may not be employed as new hires by the acquiring company. The target’s retirement plan continues to be sponsored by the target.
Company mergers can be structured in many ways. Often one company is absorbed into the other (the stock of one company is exchanged for the other). Alternatively, a new company may be formed and the stock of the old companies exchanged for the new. Depending on its structure, a merger may or may not result in the elimination of a retirement plan’s sponsoring employer altogether. Prior to the transaction, it is important to consider the effect on existing retirement plans. The following questions, not an exhaustive list, should be considered:
- Does the transaction create a controlled or affiliated service group that may result in coverage issues (i.e., that may require additional staff to be covered)?
- Should a plan be amended to provide credit for service with a prior employer?
- How will the transaction ultimately affect various plan costs?
- Will any change in the employee pool (such as the addition of Highly Compensated Employees), affect various non-discrimination tests? Do certain merger and acquisition non-discrimination transition rules apply?
- Should existing plans be merged or spun off? And, if so, are there plan benefits that may need to be protected?
- Will the transaction result in a partial plan termination that may require full vesting of affected participants?
- If it is the intention to terminate an existing retirement plan, when should the termination occur (prior to or after the transaction)? Will there be any restrictions in paying participant benefits from a retirement plan?
- If an existing defined benefit plan has excess plan assets, how will those be dealt with? Alternatively, if the plan is underfunded, what are the ramifications?
- A plan without a sponsoring employer is considered an ‘orphaned plan’. Is the transaction being structured such that there will be no resulting orphaned plan(s)?
We Can Help With Merging 401k Plans or Pension Plans
Retirement plans are just one facet of mergers and acquisitions, but they are an important consideration. Pinnacle Plan Design is available for consultation in these matters. Contact us with your questions!
Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting. Pinnacle has a local presence in Tucson and Phoenix, Arizona (AZ), as well as Houston, Texas (TX) and Columbus, Ohio (OH), and we proudly serve businesses nationwide.