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Advisors’ Checklist: Helping Your Retirement Plan Clients Through M&A Activity

Advisors’ Checklist: Helping Your Retirement Plan Clients Through M&A Activity

The last few years have seen record mergers and acquisition activity, with plenty of opportunities for advisors to help clients evaluate some key issues related to their retirement plans. Whether your client is entering into a corporate merger, acquisition, liquidation, consolidation, or spin-off, there can be significant impacts on the retirement plans involved, and you can help your client avoid often overlooked problems. Flagging these issues for your clients now will help them avoid headaches and potential tax and other penalties later.

Here are some things to consider:

1. Transaction Structure

M&A transactions greatly impact the parties’ retirement plans and can be easily overlooked. In an asset purchase, the buyer purchases assets of the target company and generally wants to limit or eliminate its liability for any issues associated with the seller’s plan. That can usually be accomplished by terminating the target company’s retirement plan and starting a new plan to avoid becoming a successor plan sponsor. In a stock sale, the buyer purchases assets and liabilities, and the purchased company becomes a subsidiary of the buyer and part of its controlled group. In a merger, the buyer and seller form a surviving entity, and any obligations owned or owed by either company are now owned and owed by the survivor.

2. Service Provider Contracts, Collective Bargaining Agreements, and Other Important Documents

The buyer should be aware that the target company has been operating its plan in compliance with legal and regulatory requirements. They can confirm this through a document review—this should include the plan documents, all amendments, nondiscrimination test results, and group annuity contracts. It should also cover the most recent determination letter, which verifies the plan's qualification and helps avoid the potential consequences of mixing non-qualified assets with qualified assets. Additionally, reviewing the most recent Summary Plan Description (SPD) and Summary of Material Modifications (SMM) is crucial to understanding what information has been communicated to savers and could become binding on the employer. One often overlooked area is the review of existing contracts with record keepers, custodians, and collective bargaining agreements to determine whether there are any advance notice requirements before terminating those relationships, any required contribution increases or termination fees, or any other restrictions.

3. Investment Lineup

The plans involved in a transaction will rarely have the same investment options as the buying/merging company. Review the lineup carefully to evaluate any fees or other restrictions.

4. Protected Benefits

Plans from different companies will also likely have different plan features. The plan’s provisions must be analyzed to ensure that the transaction does not violate the anti-cutback rule.

5. Controlled Groups and Coverage Testing

A transaction may result in the seller becoming a subsidiary and part of the controlled group of the buyer. That means the buyer’s compliance testing must include the subsidiary’s employees unless excluded. Employees of the purchased organization may need to be given meaningful benefits in order for the plan to satisfy compliance testing.

6. Service Crediting Rules

A new organization must consider whether—and to what extent—an employee’s service with the prior organization counts for eligibility and vesting in a new plan.

7. Transition Relief

A plan may have a limited period of time before coverage testing is required if three conditions are met: the transaction causes a company to become or cease to be part of a controlled group, the plan passed coverage tests before the transaction, and there weren’t any significant changes in the plan features or coverage of the plan. If those conditions are satisfied, then the plan will be deemed to meet coverage requirements until the end of the plan year after the year of the transaction. Plan amendments made after the transaction could end that transition relief period.

8. Same Desk and Successor Sponsor Rule

The seller’s plan might be unable to terminate if the new entity is a continuation of the old one. Where the employee performs the same work in the same location, even if there has been a formal change in the employer name, the same desk rule applies, and the seller’s plan may have to retain the accounts and continue operating the plan. Additionally, the buyer may be unable to offer a new plan right away if it is considered to really be a successor to the seller.

9. Loans

If a plan is terminated, the saver's retirement plan balance must be distributed with an offset taken for the amount of the outstanding loan amount. The employee needs to roll that distribution to an IRA or other qualified retirement plan to avoid early withdrawal penalties. The buyer may consider making alternative arrangements to ease the burden on savers with outstanding loans.

10. Missing Savers

All plan assets must be distributed following a plan termination. Businesses should build in additional time and resources to locate terminated savers whose addresses may have changed. The IRS recently issued guidance about how to deal with these missing savers.

11. Different Plan Types

Issues can arise when a transaction involves different plan types (e.g., defined benefit plans, defined contribution plans, safe harbor, and non-safe harbor plans), especially if one of them is a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan. By design, those plans require automatic enrollment of all eligible employees who have not made an affirmative election. If the surviving plan is a QACA plan, the employer must make sure all requirements are met in enrolling the acquired employee population.

12. Forfeiture Accounts

The acquired plan may have a balance in a forfeiture account, which may need to be depleted before the transaction closes. The plan may also address what happens to funds remaining in the account, whether they become assets of the new plan or can be used to offset plan expenses or other permissible purposes.

13. Excess Contributions

Transactions may cause one of the plans to have a short plan year, and the employer or saver of the acquired plan may have overfunded the plan. Buyers should be on the lookout for savers who are approaching the IRS annual contribution limits.

14. Saver Communications

Communicating with savers plays a critical role in creating a smooth experience. In addition to distributing legally required notices, employers should send saver-friendly communications to educate employees about the plan and their overall benefits.

Going through M&A activity can be overwhelming enough. It’s important for your clients to have a trusted source who can walk them through the implications of their retirement plans, and proactively addressing these potential pitfalls can go a long way.