An important, yet often overlooked, part of business acquisition involves review of current retirement plan programs sponsored by the buyer and the seller. When retirement plans are reviewed as a part of a properly planned and executed business acquisition, more flexibility and more options are on the table, which significantly reduces chances for unforeseen and expensive complications. The decision-making process requires understanding of the regulatory requirements, financial impact, plan design and employee communications.
For that reason (and not to inadvertently eliminate certain planning options), it is important to address the following areas before entering the transaction:
- Type of a plan sponsored by each entity involved in the transaction; this extends to qualified plans and other tax-advantaged plans, such as IRA-based SEPs and SIMPLEs
- Plan options available based on the type of transaction, asset sale or stock sale
- Objectives for the retirement program post transaction
- Timelines and implementation
Transaction type will largely drive the set of options available to buyer and seller. Transactions are generally classified into two types: the sale of stock or equity interests in a company, or the sale of the assets of a business or a portion of the business:
- In a stock sale, after the sale, the business or ownership interest is owned by the buyer who effectively takes on the assets and liabilities of the selling company.
- In an asset sale, post transaction, the seller retains the ownership interests in the business and any assets not involved in the transaction. The buyer acquires only the assets specified in the transaction.
In a stock transaction, assuming the plan is not terminated prior to the transaction, the buyer generally assumes the seller’s retirement plan. In case of a complete or partial asset sale, the seller generally remains responsible for the plan, unless the parties agree otherwise. Specific details of business acquisition are typically defined and disclosed in the buy/sell agreement. This document should include a section describing which party is responsible for any retirement plan(s).
Controlled group/affiliated group determination
Another aspect, often forgotten in business acquisition in reference to retirement plans, is ownership in other organizations, either direct of by attribution from family members. If a business is a member of a controlled or an affiliated group, it is treated as a single employer for plan purposes along with other members of the group. Business acquisition may create an affiliated or controlled group of companies or expand it by adding new members. Understanding of ownership structures pre- and post-transaction before effectuating acquisition will allow both the buyer and seller to have more flexibility and options, including ability to maintain separate plans, create different benefit structures for classifications of employees, etc.
Depending on the big picture objectives, you may want to keep separate plans for the entities involved in the transaction, merge plans, or terminate them. Your choices will be dictated by transaction type, timing, and rules established for qualified plans. For instance, if the plan in question is a 401(k) plan, termination may not be the best option due to the IRS successor plan rules. Plans are considered “successor” if they existed at the time the first plan existed or are established within 12 months immediately following the distribution of assets from a 401(k) plan. Therefore, to avoid these rules, it is often best to exercise this option prior to the acquisition date.
Areas to Evaluate
As you evaluate the goals for your retirement plan post transaction, consider the following aspects:
- How much does it cost to establish and administer?
- What is the impact on employee compensation package?
- What is the impact on overall benefit costs?
- How much flexibility do you have in terms of benefit commitments to your employees?
- Will you want to establish different benefit levels based on employee groupings?
- What are the demands of the plan on you as plan fiduciary and are there opportunities to outsource some of the them?
- What are the regulatory requirements associated with the retirement program?
Once you have chosen a course of action, make sure it is properly reflected in the buy/sell agreement including responsibilities of each party, financial commitments, and timing. Make sure that employees involved in the transaction understand its impact on benefits accumulated to date of the transaction and any changes that may follow.
Some of those communications are prescribed by law and will require adherence to specific timelines and content. Examples of those notices include 204(h) notice which informs participants of benefit reductions, blackout notice which needs to be provided to participants to inform them of possible restrictions in account access due to change of plan investment provider.
Due Diligence for an Existing Plan
If, in the course of an acquisition, it is determined that it is best to take over or merge the seller’s plan into the buyer’s plan, it is important to thoroughly review the plan that’s being absorbed.
Examples of items which should be reviewed include:
- Plan document and amendments
- Service agreements with current plan providers
- Contracts with description of expiration dates and fee arrangements
- Compliance testing results from prior years
- Current investment menu and documents outlining the process of on-going fund monitoring
- Form 5500 filings
Success in business acquisition has many components and dependencies. Reviewing retirement plan arrangements and assessing alternatives as a part due diligence and planning will help reduce chances of unpleasant surprises along the way and once the transaction is finalized.
View this case study for a recent example of proactive business acquisition and retirement plan review.