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.