How Company Retirement Plan Design Can Be Affected in a Merger or Acquisition

Senior Vice President, Argent Retirement Plan Advisors
(318) 588-6830 |

Chris Shankle

Managing a merger or acquisition (M&A) of a business is an exciting, yet demanding endeavor for business leaders, so it’s easy for something like a company retirement plan to slip through the cracks during negotiations.

Not paying close enough attention to company retirement plan design before a transaction is closed could be costly.  The Employee Retirement Income Security Act of 1974 gave the U.S. Department of Labor (DOL) the authority to investigate retirement plans. And if violations are determined, the DOL can levy fines and other penalties. So, in order to mitigate compliance risk and avoid costly federal fines, senior managers should include a rigorous analysis of company retirement plans as part of the transaction’s due diligence process.

Benefit plan advisors can play an important role as a fiduciary in helping human resource and accounting/finance officers make sure any changes made to company retirement plans due to a transaction are in compliance with state and federal law. Here’s how advisors can ensure a smooth transition of a new program plan in the newly combined company:

How is the merger & acquisition transaction structured?

Most M&A transactions fall into three categories – stock sales, asset sales and mergers – and each affects company retirement plans in different ways.

  • •  In a stock sale the acquiring company generally keeps its existing plan and terminates the acquired company’s plan.
  • •  In an asset sale (where the buyer purchases only the assets and liabilities), employees from the acquired company will be considered terminated. Any employees from the selling company that are hired by the acquiring company would become participants in the buyer’s plan according to its eligibility rules.
  • •  In a merger, the surviving company is responsible for all plans sponsored or adopted by either company before the transaction. Benefit plan considerations are very similar to those of a stock sale.

Once the transaction structure has been determined, managers should next analyze two important considerations that affect company retirement plan design: coverage and termination.

Company retirement plan coverage rules rule

Internal Revenue Code (IRC) §410(b) provides very specific rules that qualified retirement plans must consider regarding the benefits offered and employees who are covered. If an employer offers a plan or multiple plans, each company’s plan must pass non-discrimination testing. This comes into play in mergers and stock sales because there generally is an immediate change in employee demographics and in the design and structure of retirement plans due to the transaction.

Fortunately, IRC §410(b)(6)(C) provides each company enough time to meet non-discrimination testing requirements. The relief period is the first day of the transaction through the last day of the following plan year. Both plans may continue to operate separately under their existing terms during this period.

Pay attention to termination rules

Another matter to consider is rules under IRC §401(k) that prohibit the termination of a 401(k) plan after a merger if there is an “alternate defined contribution plan” sponsored by the acquiring or surviving employer. If both plans continue to exist after the merger, the employee deferrals and any qualified non-elective contribution balances of the 401(k) plan targeted for termination must be merged with the “alternate defined contribution plan” of the surviving company. Any other contribution sources, such as matching or profit sharing contributions, can be distributed. This treatment is triggered in a merger and stock sale where both parties have plans and one of them is a 401(k) plan.

Once the date of merger occurs, the ability to terminate the seller’s plan goes away. In instances where there are administrative issues or concerns regarding the acquiring company’s plan or a general desire to terminate the 401(k), such matters should be communicated to the target entity so that the plan is terminated prior to the date of the transaction. Participants are required to be provided with a notice of termination at least 60 days, but no more than 90 days, prior to the date of termination.

Benefit plan administrators must evaluate many moving parts when integrating company retirement plans during a transaction. Coverage and terminations are only two of many areas to examine during a compliance review, but they’re the ones that could trip up benefit plan administrators the easiest and lead to DOL penalties. Undertaking a thorough review of company retirement plans before closing will help administrators transition the plans and ensure compliance.


Argent Financial Group

Argent Financial Group (Argent) is a leading, independent, fiduciary wealth management firm. Responsible for more than $30 billion in client assets, Argent provides individuals, families, businesses and institutions with a broad range of wealth management services, including trust and estate administration, investment management, ESOPs, retirement plan consulting, funeral and cemetery trusts, charitable organization administration, oil and gas (mineral) management and other unique financial services. Headquartered in Ruston, Louisiana, Argent was formed in 1990 and traces its roots back to 1930.

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