Plan Post-merger

[Guest blackacre]

One employer may merge into a larger one. The large company has a DB plan and a 401(k) with a 3% match. The smaller firm has a PS/DC plan with a 3.5% discretionary employer contribution (which has routinely been made) and a dollar for dollar match up to 6% of salary for participants.

Obviously, employees at the smaller company are loathe to lose their 401(k) with an effective 9.5% of salary contribution from the employer.

The formula for the new employer's DB plan is not particularly generous. It has a rule of 80 for vesting and a 1.65% x years of service x highest salary.

Is it possible to maintain the smaller employer's 401(k) only for current participants? Could employees of the smaller firm participate in both DC plans?

I'd appreciate any thoughts on how this generous plan can be maintained.

Also, any thoughts on how to value and compare the new DB plan and the existing smaller company PS/401(k) plan.

Thank you very much.

[david rigby]

The fact that the plan sponsor is being acquired does not require that the plan will change, or go away. Depends on many factors.

The plan sponsor could engage an actuary to assist in comparing the value of the two types of plans. However, there will always be at least some element of "apples vs. oranges" in such comparison.

What is the "rule of 80"?

"...not particularly generous"? The plans I see are almost always less generous than 1.65% accrual rate.

[Guest blackacre]

Thanks for your response.

The Rule of 80 is a vesting rule that age plus years of service equal 80. I'm pleased to hear that you think the 1.65% rate of accrual is good.

Would you identify the factors that would affect or determine the continuation of the smaller company's 401(k) plan? Simply the choice of the larger company? Can a plan be closed to new participants? That is, continued only for existing participants at the time of the merger? (a cost saving)

[Blinky the 3-eyed Fish]

A plan can be closed to new participants. The issue is whether it can pass coverage this way. If there were mostly NHCE's in the smaller company's plan, then there is a good chance it would pass coverage on its own. If they didn't pass coverage on their own, it could be aggregated with the other DC plan and general tested, but that sounds like much additional work.

As for the rule of 80, I am betting that is a requirement for early retirement. I couldn't be a vesting requirement. My guess is that the DB plan has a 5-year cliff vesting schedule.