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Plan Merger Following Acquisition and Service Credit


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Here are the scenario and the questions:

  • Company A acquires 100% of Company B (stock deal).  Each company maintains its own 401k plan.
  • After the acquisition, Employee X is transferred from Company B to Company A.  As a result, Employee X begins to participate in Company A's 401k plan and stops participating in Company B's 401k plan.
  • Question 1:  For purposes of vesting employer contributions under Company A's 401k plan, must Company A give vesting service credit to Employee X for his service with Company B prior to the corporate acquisition?  I think no, but would appreciate some thoughts.  (I think it is agreed that vesting service credit must be granted for the period of time after Company B joined Company A's controlled group.)
  • Question 2 (this question assumes that the answer to Question 1 is no, otherwise this question, I think, is moot):  If, after Employee X begins working for Company A and participating in Company A's 401k plan, Company B's 401k plan is merged into Company A's 401k plan, must Company A's 401k plan give Employee X vesting service credit for his service with Company B prior to the corporate acquisition?  I think so based on IRC 414(a) and Reg 411(a)-5.  Again, would appreciate some thoughts.
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My view on Question 1 is as follows:

  • When Employee X transfers to Company A and begins to participate in Company A's 401k plan, he receives service credit for his future service with Company A and for his prior service with Company B since the date that Company A acquired Company B.
  • I have not found anything in IRC 414 or 411 that requires the Company A 401k plan to give service credit to Employee X for his Company B service before Company B became a member of Company A's controlled group.  Mike and Lou seem to be saying otherwise.  Any authority that I can be pointed to on that?

Contrast this with the analysis under the Company B 401k plan:

  • Employee X receives service credit for his entire service with Company B (the plan sponsor), both pre- and post-acquisition.
  • Employee X also receives service credit for his service with Company A once he is transferred there (as Company A is at that point part of Company B's controlled group).

So, under my analysis, Employee X gets service credit under both 401k plans for all of his service post-acquisition, but only under the Company B 401k plan for his service pre-acquisition.  And then, turning to my Question 2, I think this distinction goes away once (if) you merge the Company B 401k plan into the Company A 401k plan, as that then brings his additional service credit under the Company B 401k plan into the Company A 401k plan.

Is this the incorrect way to view this?  Is my analysis implausible?  If so, I am not understanding why?

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From question 2, for Company B's 401(k) plan after the transaction the merged company is the sponsor of this plan. Treasury Regulation 1.411(a)-5 and IRC section 414(a) addresses vesting credit for predecessor employers. Under these the service with Company B prior to the transaction would be recognized.

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