Key insights
- Making arrangements for the retirement plan should not be overlooked in the acquisition process as it can lead to costly and time-consuming challenges if not addressed in a timely manner.
- Choosing an option for the retirement plan of an acquired company depends on the type of sale (asset sale or stock sale) and the responsibilities and liabilities associated with each option.
- Key considerations for evaluating a plan merger include compliance, vesting and eligibility requirements, investment options, communication and education, and fiduciary responsibilities.
Build an EBP integration strategy to support a smooth transition.
While there are many nuances in bringing two entities together, making arrangements for the retirement plan may not be at the top of the list. Leaving it as an afterthought may result in a costly or time-consuming endeavor.
Developing a formal strategy beforehand can help your organization identify areas of conflict, reduce inefficiencies, maintain compliance, and enhance the benefit plans to better meet the needs of the combined workforce.
Options for the retirement plan of an acquired company
When an acquired company integrates with another organization, careful consideration must be given to align the retirement plans of both the acquiring and acquired companies. Each approach has pros and cons.
Here are the options for retirement plans of a company that is being acquired:
- The retirement plans of both companies can be merged together
- The acquired company’s plan can be terminated
- The retirement plans of both companies can continue to exist and operate separately
- The retirement plan of the acquired company may be frozen to new participants or contributions
The type of sale affects your choice of options
In an asset sale, only identified assets are passed to the buyer. Ownership of the company and the associated retirement plan typically stays with the seller. The choice for maintaining or terminating the plan rests with the seller.
If the seller decides to terminate the plan, they would be responsible for distributing assets and filing the final Form 5500. Unless otherwise agreed to as part of the acquisition, usually any liabilities or compliance/qualification issues of the terminating plan remain with the seller and are not transferred to the buyer. This is a major advantage in having the retirement plan terminated instead of merged.
In a stock sale, the buyer is essentially slipping into the shoes of the seller and takes responsibility for the retirement plan, including any historical issues. Typically in a stock sale, the buyer cannot terminate the plan. As such, it’s important for the buyer to know if the seller plans to terminate the plan prior to the sale.
If the plan is not terminated, the most common option due to administrative burden is to merge the seller’s retirement plan with the buyer’s existing plan.
Key considerations when evaluating a plan merger
Plan document and compliance
Verify the merged plan complies with all applicable laws and regulations, including the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Review the plan documents of both plans to identify any discrepancies or noncompliance issues.
Vesting and eligibility
Evaluate the vesting schedules and eligibility requirements of both plans to determine how they will be addressed in the merged plan. Consider the potential impact on participant benefits and communicate any changes to employees.
Investment options
Assess the investment options offered by each plan and determine how they will be mapped in the merged plan. Consider factors such as investment performance, fees, and participant elections. Confirm the merged plan offers a wide range of investment options to meet participants’ needs.
Recordkeeping and administration
Evaluate the recordkeeping and administrative processes of both plans and determine what controls need to be changed or updated to complete all administrative functions timely. Consider the capabilities and experience of the plan service providers and administrative staff involved in the merger.
Communication and education
Develop a comprehensive communication and education plan and timeline to notify participants about the merger and any plan modifications. This includes information about the transition period. Provide clear and timely communication to address any concerns or questions from participants.
Fiduciary responsibilities
Properly address all fiduciary responsibilities throughout the merger process. This includes conducting due diligence, documenting decisions, and acting in plan participants’ best interests.
How we can help
Careful planning and consideration can result in a smooth transition for participants and help reduce costs and compliance issues. Our multi-disciplinary team of advisors can guide you through the complexities of the M&A process to help make your transaction successful.