Posts

Print Friendly Version Print Friendly Version

Asset or Stock Sale—Which Could Trigger a Plan Distribution?

An advisor asked:  “Between an asset and stock sale of a company, which transaction could trigger a plan distribution for participants?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from San Diego, CA is representative of a common inquiry involving company mergers and acquisitions and what happens to the retirement plans of the involved entities.

Highlights of the Discussion

That is somewhat of a trick question because there is a “general” answer and then there is the “facts and circumstances” answer. Let’s take a look at both answers.

Generally, in a “stock-for-stock” sale, the buyer acquires everything (i.e., “lock, stock and barrel”), including any retirement plans. Consequently, the acquired employees would not incur a severance from employment and, therefore, would not have a distribution triggering event as the buyer would, most likely, assume responsibility for the seller’s plan. In that case, the buyer could choose to merge the acquired company’s plan into its own plan (if one existed) or maintain the plans separately.

Generally, in an asset sale, the acquiring employer would not acquire or continue the seller’s plan, resulting in termination of the seller’s plan and a distribution triggering event for its participants.

However, taking a general approach to complicated transactions like stock and asset sales can land one in hot water. The most prudent approach is for the entities involved to specifically address what will happen to the retirement plans as part of the M&A negotiations.

For example, based on the facts and circumstances of the M&A transaction, it is possible, in a stock transaction, that the merger agreement could specify that the seller terminate its retirement plan. Plan termination would need to be completed prior to the closing date of the merger. If the plan is terminated in a manner compliant with requirements for plan termination, the participants of the seller’s plan would have a distribution triggering event.

Similarly, based on the facts and circumstances of the situation, the merger agreement could specify that the buyer will assume sponsorship of the seller’s plan after the asset sale is complete and, therefore, forestall a distribution triggering event.

Plan assessment tools are helpful in M&A situations. For example, the Retirement Learning Center offers a service called the Plan Forensic Analysis, which is a comprehensive assessment of retirement plans and their provisions, used most often to compare two or more plans involved in an M&A scenario. Such a review is helpful for advisors and their plan sponsor clients to identify potential issues and options as part of the M&A process so there are no surprises (e.g., what will happen to the plans, how do we deal with protected benefits and/or who is responsible for plan corrections).

Conclusion

Generally speaking, a stock sale will not result in a retirement plan distribution opportunity for participants, while an asset sale will, unless the merger agreement specifies otherwise. The most prudent approach to handling retirement plans in an M&A scenario is to address the plans head on as part of the transaction negotiations, use plan assessment and comparison tools, and document decisions.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
Print Friendly Version Print Friendly Version

When SIMPLE IRA plans aren’t so simple Part 1 Mergers and Acquisitions

Following an acquisition, can a business owner continue to offer both a SIMPLE IRA and a 401(k) plan at the same time?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans. The advisor explained: “A CPA that I network with had a small business client that maintained a SIMPLE IRA plan. The CPA’s client purchased another business in 2018 via a stock acquisition. The acquired business brought with it a 401(k) plan.”

Highlights of the Discussion

Because of the circumstance (i.e., an acquisition) an exception to the “exclusive plan rule” for SIMPLE IRA plans applies.  Among the employer eligibility rules for maintaining a SIMPLE IRA plan is the exclusive plan rule. In general, a single employer may not maintain a SIMPLE IRA plan in the same calendar year it maintains any other type of qualified retirement plan.[1]

In the situation noted above, the merger of the two businesses results in one employer with two plans (a 401(k) and SIMPLE IRA plan) during the same calendar year. Fortunately, a temporary exception to the exclusive plan rule is available. The temporary exception allows the merged businesses to maintain another plan in addition to the SIMPLE IRA plan during the year of merger or acquisition, and the following year as long as, only the original participants continue in the SIMPLE IRA plan (See Q&A B-3(2) of IRS Notice 98-4).

Let’s use this situation as an example. The ownership change occurred in 2018. The SIMPLE IRA plan can be maintained in 2018 and through 2019, along with the 401(k) plan, without running afoul of the exclusive plan rule. Before 2020, however, either the SIMPLE IRA plan or the 401(k) must be terminated.

Conclusion

Acquisitions and mergers involving multiple retirement plans can complicate SIMPLE IRA plan operations due to the exclusive plan rule. It is important to be aware of the transition rule in these scenarios.

[1] Another plan would include a defined benefit, defined contribution, 401(k), 403(a) annuity, 403(b),  a governmental plan other than a 457(b) plan, or a SEP plan.

© Copyright 2021 Retirement Learning Center, all rights reserved
retirement plan
Print Friendly Version Print Friendly Version

Time to Deal with Mergers

Time for Managing a Plan Merger

“My client is working through a business acquisition, which will involve merging two 401(k) plans.  He is concerned about how quickly they will be able to merge the plans.  Are there guidelines on compliance testing for the plans during the merger process?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • A special “transition rule” under Internal Revenue Code Section (IRC §) 410(b)(6)(C) applies for meeting employee coverage requirements in situations where an acquisition involves the merging of two plans. Under these rules, the plan will continue to be considered in compliance with minimum coverage requirements during a “transition period.”
  • The transition period is the period that begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction.  For example, for an acquisition that takes place on September 1, 2017, the transition period that would apply for a calendar year plan would last until December 31, 2018.
  • The transition rule is only available if 1) both plans satisfy the coverage rules immediately before the acquisition; and 2) there are no significant changes in either the terms of the plan or the coverage of the plans following the transaction.

Conclusion

The merging of two employer plans is a complicated and time consuming process. Fortunately, from an employee coverage perspective, there are transitional rules that give the employer some relief.

 

 

 

© Copyright 2021 Retirement Learning Center, all rights reserved