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Jan 5, 201601:18 PMOpen Mic

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401(k) plans — What happens with a merger or acquisition?

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With a merger or acquisition, what happens to a corporate 401(k) or qualified retirement plan?

The first step would be to answer: how is the merger or acquisition structured? Once a corporate retirement specialist understands the acquisition structure of a stock or asset purchase, then they can help you and/or your clients understand and evaluate what options are available. 

401(k) plans — maintain, terminate, or amend after a merger

As a case study, here are some of the questions to address:

  • Did you and/or your attorney address the retirement plan(s) in the purchasing agreement?  If not, there are several points to consider:
    • Does the buyer wish to maintain the plan? If so, typically the buyer has numerous options; specifically, the buyer can maintain the plan as is and consolidate the purchased company plan into it, or vice-versa, merge the purchasing company into the acquired plan. There are notification requirements for employees and options given for conversion/rollover of assets into the new corporate plan or distribution options for those plan assets
    • Does the buyer wish to terminate the plan(s) and start a new plan? If so, typically a formal RFP process is completed by a corporate retirement specialist to walk the company through the entire evaluation process, from platform selection to individual investments suited to the buyer’s needs.
    • Does the buyer wish to amend the plan to better conform to the new combined entity? If so, typically a corporate retirement specialist can amend an investment policy statement (IPS) to reflect the wishes of the buyer, and aid with implementation to the employees as an aggregate.
  • Let’s imagine, for an instant, that the buyer doesn’t address these areas prior to the purchase of the business. The buyer completes the purchase and decides after the sale to terminate the retirement plan(s). It is possible that costs could be incurred for both the buyer and the seller. Moreover, depending on how the purchase is structured, either or both parties may have responsibility to pay for the termination of the plan, mostly after the fact.
  • Last, but likely as important as the purchase itself, is to address the benefit or detriment to employees of one or both firms. Employees should be able to review conversion/rollover of assets to a new plan; taxable events for low balance distributions (those under $5,000) allowable under IRS rules; conversion of plan assets to IRAs in the event of terminations or downsizings, and any tertiary needs due to plan design, such as Roth 401(k)s, auto-enrollment, auto-escalation of deferrals, and enhancements or detachments to company plan match dollars.

(Continued)

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