Sentinel can play a vital role in making sure your company’s merger, acquisition or divestiture activity doesn’t lead to unintended consequences for your retirement plan.  It’s important to let your Plan Consultant know as soon as possible when you’re contemplating any merger, acquisition or divestiture.

Why Letting Your Plan Consultant Know About Your Transaction as Soon as You Can Matters

If you’re acquiring a company or planning a merger or a divestiture of a portion of your company, that can impact both your retirement plan and the retirement plan of the other company involved in the transaction. Depending on the type of acquisition or disposition and other details of the transaction, waiting until after the deal closes to address what will happen to your and the other company’s retirement plans can result in more limited options for you and the other company and other complications. These unfortunate results can be avoided by looking at and addressing the impact of the acquisition, merger or divestiture on the plans proactively, prior to closing. Your Plan Consultant can help you work through the impact on the plans of the particular transaction you’re contemplating and help ensure that what happens with the plans is what you want to happen, to the maximum extent possible.

Why Transaction Structure Matters

There’s a world of difference between a transaction that’s structured as an entity acquisition or disposition and a transaction that’s structured as an asset acquisition or disposition.  That difference has significant implications for your retirement plan and the retirement plan of the other company in the transaction.

With an entity acquisition or disposition, the legal entity running the business remains the same before and after the transaction; what changes is who owns that entity. It’s common with an entity acquisition or disposition for the entity being sold to become a subsidiary of the buyer.

With an asset acquisition or disposition, the assets of a business change hands, but the legal entity that ran that business remains owned by the same people who owned it prior to the transaction. The buyer may add the acquired assets to an existing entity of the buyer’s or may set up a new entity to hold the assets of the acquired business. The buyer does NOT become the owner of the entity that ran the business before the transaction.

Because the two transaction types differ significantly in what happens to the entity that ran the acquired business before the transaction, the impact of the two transaction types on the retirement plans of the buyer and seller differ.

How a Business Transaction Can Impact Retirement Plans

If you acquire or dispose of an entity, any retirement plan sponsored by that entity generally follows the entity. For example, if you acquire a business via a stock acquisition and that business becomes a wholly owned subsidiary of your company, the retirement plan sponsored by that business remains sponsored by that business and indirectly becomes your plan, unless action is taken prior to closing to terminate the plan. If you don’t ensure that the acquired company’s plan is terminated prior to the closing and it’s a 401(k) plan, you won’t be able to terminate it after the closing if you also sponsor a 401(k) plan. Your only options will be to maintain the acquired company’s plan as a separate plan or merge that plan into your plan.  

Merging the acquired company’s plan into your plan runs the risk of contaminating your plan with any errors in the acquired company’s plan, which can make it a very undesirable option. Maintaining two separate plans also can be problematic because it can complicate administration and testing for both plans. Terminating the acquired company’s plan before closing often provides the cleanest solution for the acquirer. However, in many cases, this option is only viable if it’s used before the transaction closes, making it vitally important that you look at your options for your plan and the other company’s plan before the closing occurs.

By comparison, if you acquire the assets of a business from another company or sell a portion of your business assets to another company, the retirement plan associated with that business doesn’t move with the assets. The plan remains with the seller. If you’re the buyer, that means that you have no responsibility for the acquired business’ retirement plan; the seller retains that liability.  However, you may want to grant service credit to the employees you acquire with the business, to enable them to participate in your plan right away and be vested based on their service with their prior employer as well as service with your company. To do that, your plan must be amended, and it must be amended before the new employees are allowed to participate in your plan.

If you’re the seller in an asset disposition, you remain responsible for the retirement plan of the sold business, whether that plan was part of your plan or a separate plan. If it was part of your plan, you may want to transfer the assets of your plan associated with the employees transferring to the buyer to the buyer’s plan. That transaction involves spinning off those assets into a separate plan and then merging that separate plan into the buyer’s plan. To accomplish that, you, the buyer and the trustees of both plans would enter into a merger and transfer agreement, providing for the asset transfer. Then Sentinel, on behalf of your plan, and the third-party administrator of the buyer’s plan would work together to implement the asset transfer, and the transfer of data that needs to go with it. The good news is this can be accomplished after the transaction closes.

If you’re the seller and the business whose assets you sold sponsored a separate plan, that separate plan can be transferred to the buyer or it can be terminated. The good news is this doesn’t have to happen before the closing occurs. The bad news is you remain responsible for the plan and its operation until you do something with it.  

In either case, the employees who were transferred to the buyer with the sold assets are treated for purposes of the seller’s plan the same as any other of the seller’s terminated employees. They can take distributions from the seller’s plan and, if desired, roll them into an IRA or their new employer’s plan.

In Conclusion

These are just some examples of the possible ways in which an acquisition, merger or disposition of a business can impact your retirement plan and the retirement plan of the other company involved in the transaction. There are many factors to take into consideration in deciding how to handle your plan and the plan of the other company involved in the transaction. Your Plan Consultant can guide you in assessing the particular factors at play in your transaction and help you determine what path is the right path for you.