Jump to content
kmhaab

Multiple Employer Plan - Spin-off and Terminate, or Transfer Assets?

Recommended Posts

Company A is buying Company B in a stock transaction.  Company B participates in a multiple employer 401(k) plan.  In drafting the merger agreement, Company A wants to take on as little liability as possible associated with B's participation in the multiple employer 401(k) pre-merger.  

Company B will be withdrawing from the multiple employer plan and either 1) spinning off the plan assets into a new plan and immediately terminating the new plan prior to the close of the merger, or 2) transferring Company B employees' assets into Company A's 401(k) plan.

Does a transfer of assets into Company A's plan create any more liability for Company A (related to the plan pre-merger) than if Company B's assets were spun off and that plan terminated?

   

Share this post


Link to post
Share on other sites

You said this is a stock acquisition, so it's like Company B is terminating its 401(k). Review the 401(k) distribution on termination rules. The company B employees likely won't be able to participate in a K plan for a year if you do that.

Share this post


Link to post
Share on other sites

With some trepidation, i suggest that Luke Bailey’s comment is misplaced.  It is a common practice in a stock acquisition to terminate the target’s 401(k) plan immediately prior to the merger. Analytically, the IRS accepts that the termination occurs in a different controlled group than the acquirer’s controlled group, so the one-year rule does not apply to the target’s employees after the merger. A transfer will prevent participants from an unfortunate choice in disposition of a termination distribution, but it comes with greater theoretical risk of problems from the multiple employer plan.

Share this post


Link to post
Share on other sites
On ‎7‎/‎3‎/‎2019 at 5:46 PM, QDROphile said:

With some trepidation, i suggest that Luke Bailey’s comment is misplaced.  It is a common practice in a stock acquisition to terminate the target’s 401(k) plan immediately prior to the merger. Analytically, the IRS accepts that the termination occurs in a different controlled group than the acquirer’s controlled group, so the one-year rule does not apply to the target’s employees after the merger. A transfer will prevent participants from an unfortunate choice in disposition of a termination distribution, but it comes with greater theoretical risk of problems from the multiple employer plan.

QDROphile, I agree with you. I had not paid sufficient attention to the part of the question regarding the fact that B was participating in a multiple employer plan, so the notion that it was spinning off assets before terminating had me confused I think.

Regarding the initial question, kmhaab, and just expanding a little on QDROphile's other point, the IRS has special rules in EPCRS that make it easier for acquirers who decide to merge target company qualified plans, typically 401(k), into their own plans, and who later find qualification errors, to correct those errors. Additionally, the acquisition agreement may of course contain reps and warranties from the seller to the acquiror regarding the plan's compliance, backed by indemnification provisions, which would allow the buyer to seek reimbursement from the seller of the costs of correction if problems surface post-deal.

Having said that, it's always easier and typically safer (for the acquirer) to have the seller terminate its plan pre-close, as QDROphile points out is often done, so for the acquirer to want to take the seller's plan and merge it into its plan requires some motivation other than simplicity and risk avoidance. Those motivations may include adding the target's plan to the combined plan's asset base to get lower fees from vendors, avoiding disruption to the target employees, including issues with loans, and avoiding acceleration of vesting for the target employees.

Share this post


Link to post
Share on other sites

QDROphile and Luke Bailey, 

Thank you for your thoughtful responses. Very helpful. We are in the process of negotiating the deal on behalf of the Buyer. Seller does not want to spin-off assets to a new plan and terminate (as we had proposed), arguing it is not necessary and is simpler to merely withdraw from the multiemployer plan and transfer assets to Buyer plan after the transaction. I agree it's simpler, of course, but I am unclear on the potential liability in a transfer of assets from a multiple employer 401k?

Can Seller withdraw from the multiemployer plan effective prior to the close of the transaction and transfer assets into Buyer's plan after the close? That timing seems off to me (i.e. can they withdraw if there is no plan to transfer to immediately?)

If so, does the transfer of assets to Buyer's plan bring liability from the operation of the multiemployer plan prior to the transaction?

Share this post


Link to post
Share on other sites

kmhaab, responding to your question would really require knowing more detail, but if the withdrawal is not simultaneous with the transfer of assets, you would presumably need a plan document and trust to constitute the written documents of the plan during the interim period, which would be some of the mechanics of a spinoff into a single employer plan of seller.

Share this post


Link to post
Share on other sites
On ‎7‎/‎7‎/‎2019 at 1:25 PM, kmhaab said:

If so, does the transfer of assets to Buyer's plan bring liability from the operation of the multiemployer plan prior to the transaction?

Yes, it does.  That's why it's common to terminate the acquired company's plan prior to the purchase. It is easier to transfer the assets than to terminate.  But, it's usually easier and less expensive to terminate instead of doing the due diligence research needed to determine if the other plan was operated properly.   Transferring the assets also means that 411(d)(6) protected plan features for those transferred assets must remain available after the assets are merged into Company A's plan.

As mentioned above, the determination of the "employer" is made at the time of the plan termination when determining if the plan termination is a distributable event. 1.401(k)-1(d)(4)(i) 

 

Share this post


Link to post
Share on other sites

The dialogue above is certainly impressive. It occurs to me that the best solution involves creating a short form spin-off seller plan (that mirrors the multiple plan) soon before the closing, and then terminating that "transitional" seller plan a moment before closing - with the asset distributions and transfers to follow. This would seem to avoid having buyer inherit the seller's 401(k)plan, while allowing seller's employees to immediately participate in buyer's plan. 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...