Merging of two firms

[Guest Gordy]

A client of mine, law firm, merged with another April 1, 2003. Each has their own plan. The CPA told them they didn't have to worry about the plans so they have no documentation for termination, merger, assumption of one plan by the new company or anything else.

It appears to me that:

a. No contribution can be made to either plan for the three month short period ending March 31, 2003. (Employees worked maybe 520 hours.)

b. It's to late to amend the plans to lower the allocation requirement from 1,000 to something less. (12/31 year end).

c. both plans are ongoing without plan sponsors at this time.

d. The new entity has no plan in force for the 4/01/03 to 12/31/03 period.

Any ideas?

[E as in ERISA]

A merger is typically considered a continuation of both entities -- in a different form. So I would generally assume that the merged entity continues to sponsor both plans. Of course, it depends on the form of entity and the actual legal form of combination. But I wouldn't necessarily assume that the plans were orphaned on March 31.

[mbozek]

You need to determine exactly what happened. Did A and B merge to form C or Did A merge into B, or did A dissolve first and A's partners/employees become partners/employees of B. Depending on the circumstances one or both plans may have survived although I dont know how this affects compliance under the nondiscriminaton rules. (generally the plans have a grace period for compliance until the end of the year following the merger). Your clients may need to retain counsel to derermine how to proceed since the accountant doesn't have a clue.

[david rigby]

Can I listen in when you tell this law firm that they should retain counsel?

[Guest Gordy]

Thanks for you help everyone. I'll request facts and circumstances in writting. This should be interesting.

PAX- Looking for a new client?

[Guest Kevin Wiggins]

I agree with Katherine. Usually in a merger the surviving entity assumes all assets and liabilities of the predecessor (whether one entity survived or a new entity was formed), including any ERISA plans. As such, the new entity would be the "employer" or whatever term is used by each plan. Assuming the employees worked for the employer and received compensation for that period, they should be able to get a contribution for that period.

I do agree that you will have difficulty amending the plan retroactively, but they may be able to consider the hours worked for the successor employer.

Other issues to consider:

1. Does each plan exclude from eligibility controlled group employees of employers who have not adopted the plan? If not, you may have a disqualified plan because you didn't allow eligible employees to make 401(k) contributions (I assume it is a 401(k) plan).

2. Consider the transition rules in Code Section 410(b)(6)©.

3. One of the worst things they could do is just ignore the situation and hope it goes away.

4. You need to read each plan carefully and see how the merger affected the plans.

5. Check the merger agreement to see what it says about the assumption of assets and liabilities and see if it discussed the plans.