What to Know about Retirement Plans in Mergers and Acquisitions

Regulations require that a qualified retirement plan benefit must be offered to the workforce of a company or group of companies on a non-discriminatory basis. When one company/entrepreneur acquires another the two companies generally will become a controlled group. This means that, for coverage and nondiscrimination purposes, the two companies are treated as one entity that employs everyone who works within the controlled group.

Determine if employees of acquiring (buyer) vs acquired (seller) companies must be offered access to an existing retirement plan. 
Company mergers, acquisitions or dispositions will ultimately add to or take away from the overall workforce. The employees added to the workforce, even if still part of a separate corporate entity, may eventually need be included in the acquiring company’s retirement plan. Correspondingly, if one or more companies, already sponsoring a retirement plan (e.g. 401(k)) are acquired, the acquiring (buyer) company, if not already offering a retirement plan to their workforce, may need to adopt the acquired (seller) company’s retirement plan.

If employees are not included in a retirement plan, it must be proven that excluding the employees of the acquired company and/or excluding the employees of the acquiring company is not discriminatory according to IRS regulations.
The transitioning company may also have its own retirement plan and an analysis must be performed to determine if the plan can remain unchanged covering only the employees of the separate though acquired company. If not the existing and incoming retirement plans may need to be merged. Merger of two plans might change benefits that newly acquired employees may wish to keep the same.

Timely make changes to existing retirement plan(s). 
The IRS regulations allow a period of time for retirement plans under a merger situation to be operated without change as they are transitioned into the merged entities. In order to address additional regulatory requirements that arise from discrimination testing issues, due to a business acquisition, the Internal Revenue Code includes a transition rule. “Under this rule, if the plan’s terms are such that the plan would not pass coverage testing, as a result of the acquisition, the plan is provided a transition period. During this period, the plan does not need to test coverage, if it is deemed to pass. This gives the Buyer time to assimilate the acquired entity into its organization and decide what it needs to do to keep the plan operating properly.” (Ferenczy Benefits Law Center)

In order to take advantage of the transition rule it would be helpful to review your plan prior to the acquisition to ensure that the conditions of the transition rule apply. Sometimes that doesn’t or can’t happen. Regardless of the transition period available to you/your organization, we ALWAYS recommend a review of the retirement plan(s) in advance of the plan year end (generally December 31). There are important changes that can generally be made to your retirement plan documents, if done prior to the last day of the plan year, that would be beneficial to the acquiring (buyer) organization. But, again, your retirement plan documents usually need to be amended prior to the end of the plan year to take advantage of these benefits.

It’s best to have a transition plan to make the necessary plan changes and to establish internal practices to maintain compliance with the regulations. At the end of the transition period the plans must prove compliance or correction actions must be applied. If such a transition plan was not inked before the acquisition date, it is imperative to do so right away as the transition period could go by quickly.

What Next? 
Contact a Leading Retirement Solutions team member to help you with your pre or post-merger and acquisition retirement plan review. We can review your merger and acquisition, your retirement plan(s) and your newly updated workforce, providing guidance and actionable next steps. And…we offer this service as no cost.

It’s very important to understand these requirements before and as a merger is taking place so that transitions are smooth for employees. Maintaining separate retirement plans within a commonly controlled group of companies requires such testing yearly to prove that benefits remain non-discriminatory among the workforce. Corrections for situations that are later shown to be discriminatory are expensive and may cause the employer to come up with large sums in benefit pay-outs.

For additional information and/or a merger and acquisition review, contact a Leading Retirement Solutions Team member.