Inquiring minds.....

[Guest SWH]

Okay, I've read that if I purchase another company by stock purchase and that company terminates their retirement plan prior to the stock purchase date that the term plan participants can take their money in direct distribution.

But.... (isn't there always a but....) ..... do I have to have all the monies paid out from the terminating plan before the date of the stock purchase?

If I don't, does my current company plan b/c a successor plan......

Hmm.....inquiring minds......

[Guest SWH]

Is this just a boring topic or a really ugly one that no one wants to touch with a 10 foot pole?

[david rigby]

Theoretically, every buy/sell agreement is unique, but normally, a stock purchase means the sponsoring company will have a new parent company. It does not automatically change the sponsor, but it would alter the controlled group. Thus, there is no requirement to terminate, unless the parties have agreed to it beforehand. And there is no requirement to fully distribute; since making full distributions may take some time, such provision may delay the actual sale by an unknown time.

Numerous other alternatives exist, such as a spinoff immediately before the sale, and probably many others that would require legal advice. Oh, they all require that!

[austin3515]

One important thing is that if you terminate the old plan, you wouldn't be able to start a new 401(k) plan for at least a year (assuming the old plan was a 401(k)).

[R. Butler]

One important thing is that if you terminate the old plan, you wouldn't be able to start a new 401(k) plan for at least a year (assuming the old plan was a 401(k)).

Doesn't that depend on when the plan is terminated? If the plan is terminated before the acquisition date is there a successor plan issue? I'm not so sure.

[austin3515]

Could be... Better make sure though!!

[Guest SWH]

What if acquiring company currently has 401k and wants the acquired company to adopt theirs? Would this be prevented?

[JanetM]

Maybe. Why not just acquire, have new company adopt plan and merge old plan into buyers plan. Is this being done to give folks access to their money with out termination? Depending on plan, you might be able to amend to allow in service distribution. Not really enough facts to give you concrete answer. Find ERISA counsel.......

[Guest SWH]

Just thought that I would post that I found the answer to my question in the ERISA Outline Book (2006) page 6.184, Part C.5.e.....

"If the company's stock is acquired in a manner that shifts the company from one related group to a different related group,the IRS has informally stated that,so long ast the termination date of the plan (as determined under Rev Rul 89-87) is established before the stock acquisition, the "employer" that maintained the terminated plan is not the same as the "employer" that maintains the new plan. Therefore, the company's participation in the plan ofthe new related group will not create a successor plan and hte employees of the acquired company may have their 401k balances distributed from the terminated plan, pursuant to IRC 401(k)(10)."

Thought that I would share.... thanks to everyone for all their help!!!!

[401 Chaos]

I have a follow-up question. I have always understood, as this post suggests, that termination of a 401(k) Plan immediately prior to closing the transaction would avoid successor plan issues. Here lately, however, I have seen others suggest that such an approach may not work in a merger situation where the target is merged with and into the Buyer. In that case, while it is clear that the Buyer is not the same employer as the target at the time the plan is terminated, it is not clear that the Buyer and the Target are not the same employer once the transaction is completed--the Buyer and Target basically become the same entity by operation of law. Because of the lack of express guidance in this area, I have seen some suggest that it is safer to merge the plans or request a specific ruling on the matter in order to be free from doubt. That additional distinction between mergers and other forms of transactions and the additional steps involved to merge the plans seems to run counter to the general thinking and philosophy noted in the ERISA Outline Book.

I am curious whether others see merger situations treated differently from other stock deals because of this issue. Thanks.

[E as in ERISA]

Under the controlled group and common control rules, the IRS generally treats a 100% owned subsidiary the same as a division. A stock purchase shouldn't be treated substantially different than a stock purchase/merger. But there is a lack of guidance in this whole area. So it's probably better to be as safe as possible in any case.