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Plan termination before acquisition (stock sale). Administrative responsibility "enforcement."


401QUE
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A plan sponsor was acquired via stock sale. They were told that terminating their plan before the deal closed was advisable to provide more freedom of choice to their plan participants (a distributable event allowing more distribution choices, rather than face a plan merger under the successor plan rules). The acquiring entity also did not want to take on the liabilities present in an active qualified plan with operational defects.

I don't have any details on the purchase agreement between the 2 parties, unfortunately, but will guess that not much was stated regarding the retirement plan.

So now we have a terminated plan that still has a number of steps to fully shut down, including current and future compliance testing, tax form filings, potential refunds, distributions, etc..

Question 1: Am I correct is thinking the acquiror has every right to insist that those tasks (and costs) be handled by the acquiree?

Question 2: Does the acquiror somehow inherently own the liability for the acquired company's plan anyway, absent anything in the purchase agreement specifying that the plan trustees/officers of the acquired co. are personally responsible until the plan is shut down and beyond?

Thanks for any comments and observations!

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Question 1: Assuming the transaction has closed, which your post suggests, either the acquired company no longer exists (because it was merged into the aquiror), or it is a wholly-owned subsidiary of the acquiror. Therefore, what is gained by such insistence?

Question 2: The acquiror is now responsible, either directly (if it is the successor in interest via merger or otherwise to the acquired company) or indirectly (as the owner of the acquired company).

This matter should be punted back to the lawyers who represented the acquiring company and if there is a mess to clean up it should be there responsibility.

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So... even though the acquired company (Subsidiary) did properly terminate their plan prior to the deal, [disillusionment setting in] there is really nothing to be gained by the Parent Co either way. The Parent Co either faces the hassle factor of having to do a formal plan merger for the hassle factor of back-stopping the acquired company's plan termination and administrative shutdown responsibilities.

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If the entire termination process is not complete on the date of acquisition, someone must complete it. Duh.

I agree with comments from jpod.

BTW, you don't identify the type of plan. If a DB plan, the actuary will be very helpful in this process.

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They bought the stock of the sponsor. That means the sponsors still exists. The sponsor has to deal with their plan. If the plan is disqualified the sponsor has a problem.

I admit I am not a lawyer but that is my understanding. It is that simple. The sponsor still exists but has new shareholders. Since plan actions are in the end the sponsors responsibility you know who has to do the work and pay for it. (Except for those costs that the plan can pay.)

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Sorry, DC 401k plan. Not trying to argue, nor take sides, just sort of feeling sorry for the acquiror. I always believed the party responsible for adopting the plan is the one responsible for terminating, hence my "trustee/officer' reference earlier. Can he/she/they be made to deal with the old plan, if specified in the agreement? Even still, these are people that often remain in the new subsidiary so there's all kinds of other external, political, organizational factors to consider.

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As I said, you really should punt it back to the lawyers. There may be indemnifications from the selling shareholders for breached reps and warranties that are implicated here, and no steps should be taken to do anything until the lawyers say so.

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A big part of this issue stems from the fact that the date of plan termination in the amendment to terminate and the wrapping up of final testing, 5500 filing, distributions etc. do not happen at the same time. The most effective way to make certain that the acquiring company has no liability is to plan ahead so that all of those things are completed before the acquisition. But that is not easy!

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Should have been part of the purchase agreement. Since it does not apprear to be addressed, they bought the stock and are now the de facto sponsor of the plan like it or not. The aquiring company is now responsible for the wrap up details on the terminated plan presumably now in the prosess of paying out participants and possibly waiting on an IRS DL.

I am not a lawyer though and your milage may vary.

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