Stock acquisition...

[Guest RONNIE WASEL]

Company A has 15 employees and maintains it's own 401k plan. Company B has 600 employees and maintains it's own 401k Plan.

Company A is acquiring 100% of the stock of Company B. Company A plans to make Company B a subsidiary and keep both plans in tact.

What issues do they need to address? Partial termination, severance of employement, anything at all?

Thanks,

Ronnie

[E as in ERISA]

If it's a stock sale and all the employees are moving over, you probably don't have much in the way of partial termination or severance issues. And they appear to have already made the decision to continue both plans (hopefully they evaluated all the alternatives before deciding that?)

I presume A already knows whether there are any operational issues in, liabilities to the plan -- and is negotiating purchase price adjustments based on the costs?

And that A has compared and contrasted the benefit structures? The plans will have to be tested together in the future. The benefits might need to be changed in the future in order to pass testing (if one has a match and the other doesn't). If the benefits under B's plan will have to be enhanced, they need to understand the cost. And they should take that into consideration in determining purchase price.

[Guest RONNIE WASEL]

Katherine,

In regard to analyzing how to go forward:

Company A's plan has a greater match (twice as much) as Company B's plan, which would be a tremendous expense if B merged into A. Also, I believe that if they merged, they would have to terminate B's plan and thus all the participants would be 100% vested.

So, I guess what I'm looking for is some suggestions as to what would be the best solution, merging or keeping both plans in tact. From what we've found it's to keep both plans in tact because of the expense and the vesting issues.

Suggestions?

Thanks,

Ronnie

[E as in ERISA]

The issue of whether you should merge has little to do with the rate of match. First, even if you have two different plans, you might still have to test them together and then you may have to increase the match to B in order to pass. (It all depends on what your HCE ratios are. If you have a lot of HCEs in A and few or none in B, then you are possibly going to have to enhance the benefits to B in order to pass. If you have similar ratios of HCEs to non-HCEs in each -- or at least 70% -- then you probably can test them separately or even continue with the current structure with combined testing). Second, if testing them together is not an issue, then you can have two different matching rates for two different classes of employees (A and B) in a single plan.

The decision to merge is primarily based on considerations such as: What is the cost of maintaining two plans versus one plan? Does either plan have possible qualification issues that would taint the other plan? If B has possible qualification issues, then you should consider having the former owner terminate that plan prior to the transaction.

There is generally no requirement to 100% vest B upon a merger of that plan into A. A merger is a continuation of B in a different form, not a termination.

[GBurns]

As Katherine points out vesting is not an issue, because there is neither termination of employment or termination of plan etc.

All that you have is a change in ownership, nothing more.

What remains are the issues of expenses, which should be a minor isuue and the bigger issues of keeping the plans in compliance (testing etc).

Note katherine's warnings about qualification and matching.