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Pre-acquisition Service


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Company X acquires 100% of the equity of Company Y.  Company Y was previously a wholly owned subsidiary of Company Z.

My understanding is that, because this is a stock deal, Company Y's employees have not experienced a severance from employment, and all service with Company Y (including pre-acquisition service) must be taken into account for eligibility and vesting purposes under Company X's plan.  (Unless the GCM 39824 exception is satisfied.  Let's assume it is not.)

My question is:  What about pre-affiliation service with other employers in the acquired company's controlled group?  If a Company Y employee also previously worked for Company Z, is that service required to be counted under Company X's plan after the merger?  This seems like a stretch, but I could make the argument that it should be counted.

I can't seem to locate any authority addressing the issue.

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I believe that just because the employees have not had a severance from employment, that does not mean that Employer X has to grant them past service with Y (or Z)  for purposes of the Employer X plan.  The fact that they have not had a severance has to do more with whether or not the employees have had a distributable event from a plan sponsored by Y or Z (if Y or Z had a plan).

I have notes from Ilene Ferenczy that indicate that in a stock deal, the law is not clear as to whether or not service prior to the acquisition must be counted for eligibility or vesting.  She states that many people believe it does not, but that it is probably better to explicitly state in the plan document before the acquisition. 

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  • 4 weeks later...

Thanks for this.  May I ask a follow-up question with respect to amending general Fidelity plan documents to cover the basic service tied to Y (putting aside the more complex Z question)? 


In the general Fidelity volume submitter documents, the Adoption Agreement / Plan Document generally note that service with a "Related Employer" must generally be counted for purposes of service under the Plan.  So, in that situation, if you have a stock deal and Y becomes a subsidiary of the Buyer and also becomes a Participating Employer in the Plan, does the Plan have to also be amended to expressly provide credit for prior service with Y?  It seems like with Y becoming a member of the controlled group and remaining its own legal entity that prior service with Y is already required to be counted.  

I contrast this to an asset deal where Buyer is just acquiring assets from Y and the employees of Y are terminated and come over to Buyer as part of the deal.  In that case, seems the Buyer's Plan should be amended to expressly recognize pre-deal service with Y since Y is not a related employer / participating employer, etc.

I see some plans that seem to include express prior service provisions for Y even when Y arguably is a Related Employer which I suppose should not hurt anything but just not sure it has to be done.  (In current case, it would be helpful if it did not have to be expressly noted as the company failed to amend the plan on this point previously.)

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