Impact of Merger or Acquisition on company retirement plans

Mergers and acquisitions of companies are usually driven by economic or strategic reasons.  The benefits plans are an afterthought, but can wreak financial havoc if not planned for carefully before the transaction is complete. 

At Benefit Resources we are occasionally asked by a business owner, CFO, or HR specialist for things to consider in the event that a possible merger or acquisition is being discussed.  While we are not attorneys, and cannot provide legal or tax advice, one of the advantages with working with a full service independent TPA is that we can outline certain options for the business to discuss with their attorney and consider as part of the structuring of the deal. 
impacts of mergers and acquisitions on company retirement plans, the shark and minnow case study
Let’s outline some of the options available in a merger or acquisition strategy utilizing a case study.  Harkening back to my swim team days, let’s assume that there are two companies, Shark and Minnow. 

Type of sale – There are two basic types of corporate transactions: 

  • Stock sale.  In a stock sale, Shark would buy 100% of Minnow shares at an agreed upon price.  Under this scenario, all of Minnow’s assets and liabilities would now become Shark’s assets and liabilities.  Minnow shareholders would pay tax on the gain of the sale of their shares at capital gains rates.
    • Impact: Unless the Minnow plan is terminated prior to the transaction, Shark would become the sponsor of the retirement plan once the transaction is finalized.  Careful consideration must be made to the contribution liability of the Minnow plan prior to assuming sponsorship.  Particularly in the event of a Defined Benefit Pension plan, the cost to maintain could be significant.  Retiree health benefit options could be a huge cost as well.
  • Asset sale.  In an asset sale, Shark would acquire all of Minnow’s assets (i.e., equipment, fixtures, licenses, trade secrets, inventory, client lists, goodwill, etc.), but the Minnow corporation would continue to exist.  Typically Minnow would use the proceeds from the sale of its assets to pay off its liabilities, and then they would shut down the Minnow corporation.  Minnow shareholders would pay tax on the sale of most of the assets at ordinary income tax rates.
    • Impact:  Since Minnow continues to exist, Minnow would retain sponsorship for its retirement plan.  If any employees remain at Minnow, the plan could be continued for those employees.  Any terminated employees would be paid out of the Minnow plan.  Click here to review what happens in the event of a Partial Plan Termination such as this.

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There are many nuances to both of these types of sales, and this is not a treatise on which type is better than the other, but merely lays the groundwork for how the retirement plan may be impacted under one option or the other.

If Shark does indeed become the sponsor of the Minnow retirement plan as a result of their merger or acquisition transaction, Shark has three options to consider with respect to how to proceed with their ongoing retirement plan strategy:

OPTION 1 Maintain both plans
This option may be utilized if Minnow is treated as a separate division or cost center of Shark.  If both plans are maintained, the former Minnow employees would continue to have their salary deferrals contributed to the Minnow 401(k) retirement plan.  Shark would become the Plan Administrator/Plan Sponsor of the Minnow plan. 

The participants of the Minnow plan would be employees of Shark, however, so compliance testing (i.e., minimum coverage, non-discrimination, minimum participation, etc.) for the retirement plan would have to be performed on the combined group of employees.  The mandatory compliance testing of the two plans must begin no later than the end of the year following the transaction year.  For example, if Shark bought Minnow in 2014, the Shark and Minnow plans would have to be combined for testing purposes as of the end of 2015.

The disadvantages of this option are that (1) Shark now has two sets of plan administration costs, and (2) Shark now takes on responsibility for any potential problems that may exist (known or unknown) in the Minnow plan.

At Benefit Resources we often will perform testing on more than one plan whether or not we administer both plans.  If your administrator doesn’t offer this service, click here to arrange a time to discuss your situation with one of our pension consultants.

OPTION 2 Merge the plans together
After the transaction, the Minnow plan would be merged into the Shark plan.  Vested benefits of Minnow participants are the same after the merger as they were prior to the merger. 

This is sometimes the simplest option because distributions to the Minnow employees are not necessary – all of their funds get transferred automatically into the Shark plan.  Again, however,
Shark would be assuming the responsibility for the historical activity of the Minnow plan. 

OPTION 3 Terminate the Minnow PlanNew Call-to-action
In our experience, it is most likely that Shark will leave it up to Minnow to terminate their plan as of the date of the transaction.  Upon plan termination, all of the participants of the Minnow plan are required to take a distribution from the plan at some date after the termination date.  This means that Minnow will still have work to do, even after they have sold their company. 

Approval from IRS on a plan termination is optional.  Upon termination all benefits are 100% vested.  The participants must be provided with Distribution Election forms, and may elect to receive their funds in cash, roll over to an IRA or, if allowed, roll over to the Shark plan (if they are now Shark employees).  Once all participants are fully paid out, the Minnow files a final Form 5500, and the plan is considered terminated. 

Eligibility considerations for Shark
Shark may choose to amend its retirement plan to recognize service with Minnow for purposes of eligibility and/or vesting.  Otherwise, the Minnow employees would become eligible for the Shark plan as any newly hired employee. 

Under each of the options outlined above, careful documentation must be put in place.  The Minnow plan must continue to be operated under the regulations imposed by the IRS and DOL throughout the transition or termination process.  Filings must continue to be prepared and submitted, the documents need to be kept up to date, and participant notifications must continue.

If you are either a Shark or a Minnow, please discuss the impact of the benefit plans as part of your merger or acquisition discussions with your attorney and benefits managers.  Overlooking this seemingly innocuous program could prove to be a gigantic headache.  If your TPA can’t or won’t provide you with any assistance in this area, click here to have a Benefit Resources pension consultant contact you.  We succeed when you succeed.

Now that you know the impact of a merger or acquisition on company retirement plans, make sure you are with a TPA who does as well! Psst, that's us.


You might also like:

Controlled Group Rules - What you need to know

Affiliated Service Group Rules

What is a Partial Plan Termination?

Finding Lost Participants

5 Red Flags your Third Party Administrator (TPA) is not right for you


Image courtesy of Victor Habbick /