Issues to look out for re merger of 401(k)'s???

[chris]

Client has 401(k) plan. Client going to acquire/merge with other company. Other company also has a 401(k). I don't know the in's and out's of the transaction, but only received a copy of the other company's most recent 5500 for review. I'm assuming the other company is not going to terminate it and have the e/ee's roll over or take their money. Thus, any heads up on issues which need to be addressed in the context of a merger??? Thanks.

[E as in ERISA]

This would require more than a post on a message board. A few considerations for starters....

1. Determine the form of the transaction (purchase of assets vs. purchase of stock, etc.) -- to see if the plan will come over with the business or will be left behind in a shelled out company. I.e., see if this is an issue for your company.

2. Determine if the transactional documents discuss what will happen with the plan (whether the intent is to terminate it, have the acquirer adopt it, etc).

3. If the plan is coming over, request copies of plan-related materials from target for the past three years or more (5500s, audits, participant reports, payroll reports, documents, etc.).

4. Review materials to see if the other the other plan has qualification issues (so you know whether you want to merge it with your plan -- if yours is fairly clean -- and to quantify the risk).

5. Determine if there are any other outstanding liabilities -- employer contributions due, etc.

6. Plan issues can be considered in the transactional negotiations -- either to adjust the purchase price and/or just to decide whether you will allow the plan to be merged, etc.

7. Consider the interim administrative issues (what happens to loans, when do target's employees get into your plan, do new forms have to be completed, can the employees get distributions from the old plan, etc., etc.)

[chris]

Thanks for the post, Katherine. You're correct as to there being a myriad of issues and considerations....

[J. Bringhurst]

You should also determine whether the plans maintained by the client and the acquisition target are standardized prototypes, which require participation of all employees of the controlled group.

[J. Bringhurst]

One corollary to my comment - all employees of the controlled group who have met the plan's age/service conditions must be included unless they meet either the union or non-resident alien exception.

[E as in ERISA]

Good point. Some commentators suggest that if you have a standardized prototype, then you may not be able to take advantage of the transition rule for coverage.

[Kirk Maldonado]

In addition to the excellent list of issues provided by Katherine, I would also mention to check to see if there are any "problem" investments (e.g., interests in investment partnerships, and privately held stock).

[E as in ERISA]

Another thing to look at -- the differences in the two benefit plans. Does one have a better employer contribution or better performing investments? If the target's plan is better but its employees are going to be transferred into the acquirer's plan, then employees may be dissatisfied when they come over to the new company. On the other hand, if the acquirer's plan is better and the target's employees are going to be transferred into it, then this could change the economics of the transaction -- i.e., the costs of the target business may increase when you put them into the acquirer's benefit plans.

It's not unlikely that the benefit plans have been almost completely ignored -- that they have barely been identified in the transaction documents and that there is almost nothing in "the room" relating to the plans. See what you can pull off the internet -- from freeerisa.com, the target's website, and Edgar (if they are a public company), etc. -- before you put your list together.

Also find out the size of the transaction. The importance that the benefit plan issues will be given frequently depends on the size of the plan in comparison to the size of the transaction. E.g., if you have a $100 million purchase price for the target but the target's benefit plan is new and only has $1 million, then the plan issues might get ignored. If you have a $10 million purchase price and the benefit plan is $10 million, then you might be able to get some attention for plan issues (esp. if you can quantify them and be specific about the impact).