Sale of Plan Sponsor with Pending EPCRS Application

[401 Chaos]

Does anyone have any experience with the sale of a company while they have an EPCRS application pending. In our situation, transaction will likely be structured as a stock deal for various reasons and Buyer will presumably desire termination of the 401(k) Plan prior to close. Seller, however, has an EPCRS application pending for various operational errors. Although a number of the errors were self-corrected, the Plan was still required to seek IRS approval for final corrections of certain errors. Approval and correction of those errors is not expected to be a problem as the Plan has proposed using standard IRS corrections. The problem is the EPCRS application has only been submitted for a couple of months and the proposed sale is being pushed up for various reasons. I would appreciate thoughts of anybody having dealt with a similar situation.

[rcline46]

I would make sure I advised my client to make full disclosure of the situation and let the sale agreement dictate who responsible parties are after the sale. I would also notify the IRS of the pending sale.

[401 Chaos]

Rcline, Thanks for your response. We definitely plan full disclosure to all parties as well as the IRS. I would be interested in what other types of arrangements others may have made in assigning responsibility for completing corrections post-closing, particularly the IRS's general recommendation or reactions to assigning responsibility in the stock purchase agreement. I'm sure Buyer would ideally want seller to terminate the Plan immediately prior to closing but that doesn't seem possible here given need for future corrections. If the plan is not terminated prior to closing in a stock deal, seems Buyer is generally stuck with responsibility for completing all plan corrections as a matter of law. Obviously parties can agree on indemnification and reimbursement by Seller to Buyer to cover future plan correction expenses but will IRS allow Buyer to avoid the administrative hassles of completing the correction if Seller agrees to do this? Unfortunately, deal has to be arranged as a stock deal rather than asset deal because client's primary assets are certain government contracts that cannot be assigned, only transferred as a result of a stock deal.

[rcline46]

The 'normal' result of a stock sale is that the Buyer assumes the assets AND liabilities of corporation. The agreement of sale stipulates was is not assumed.

In general, it is the corporation which has the responsibility for making the corrections required and that would pass to the new owners unless the agreement of sale stipulates otherwise. Unfortunately if the IRS is not willing to let the plan terminate and the new owners do not want the plan either the sale must be put on hold or the old owners will have to form a new organization which will assume sponsorship of the plan until the IRS is through and then terminate the plan.

[mbozek]

Closings arent delayed for benefits issues. The normal solution is for a portion of the purchase price owed to the sellers to be held in escrow until the EPCRS matter is resolved with the IRS. Any penalty or taxes will be taken out of the escrow account and the balance paid to the sellers. The lawyers for the parties can provide the necessary language.

[Belgarath]

I've often wondered how this type of thing is handled, and never knew. Seems like a good, common sense solution. Thanks for passing this along.