Asset acquisition - purchaser adopting seller's plan (?)

[mariemonroe]

Purchaser is buying assets of Seller. Purchaser will also employ many (but not all) of Seller's employees. I am being told that Purchaser would like to "adopt" Seller's qualified plan.

I was not aware that this can be done. In asset acquisitions I have dealt with in the past, Seller's plan terminates and the plan participants either get a distribution or roll their plan money either to an IRA or to Purchaser's plan (assuming such participant becomes an employee of purchaser).

I don't know how Purchaser can just adopt another entity's plan; yet I am being told that this can be done.

What happens to the plan participants who do not become employees of Purchaser?

Has anyone ever seen this before?

[J Simmons]

By agreement between Seller (as current sponsoring employer of the plan) and Buyer, the employer sponsorship of the plan may be transferred to and assumed by the Buyer. Note, Buyer's usually do not want the unknown history of the Seller's plans, and prefer starting their own fresh.

If the Seller's plan is assumed by the Buyer, those employees that do not go to work for the Buyer have a severance from employment, and may receive distribution per the terms of the plan following severance from employment.

[masteff]

I've seen this done before. Most common in my experience is that the acquired plan is frozen and the acquired employees are placed in the buyer's plan. Sometimes the frozen plan is then merged into the buyer's plan.

Some good due diligence is in order to avoid hidden problems, as J Simmons notes can be a concern. Be sure to get copies of current SPDs and plan texts (if the acquisition goes thru, be sure to get prior versions). And make sure you understand their source accounting (what a source is (get more than just an ambigious name), where type of contributions went into it, what distribution options apply to it (especially in-service), are there any special restrictions on it). Take a good look at the investment options in the plan and decide prior to the acquisition what course of action might be taken as far as keeping or replacing those options.

[david rigby]

Note that Buyer's adoption of the plan does not automatically cause Seller to cease being an adopting employer.

Perhaps both need competent ERISA counsel.

[JanetM]

Speaking from experience - don't take it on. You will be responsible for all the sins and omissions of the previous sponsor. Even if they were perfect in operating the plan. Here is what I have seen happen. 10 years from now someone will come along with copy of a statement and say they never got their money. So is you take it over get all the plan history as you will be the one to deal with the questions later.

For what its worth, we took over a few dc plans in early 2000. Participant shows up and says they never got paid. We have no record of them. Seem they were paid by prior TPA but the check was never cashed due to bad address.

Guy got a lawyer and it was a mess. Believe me it was the one time I was glad to have the IRS come to my rescue. Right about the time I explaining to the attorney the guy gets notice from IRS about unpaid tax on distribution he didn't report.

[jpod]

JanetM: Your recommendation may not always be practical, and perhaps it is not practical in this case. Suppose the seller is going out of business immediately after the closing of the sale. If the buyer does not assume the plan (whether as a frozen plan or a live plan), or if the plan is not merged into the buyer's plan, your suggestion would force the seller to terminate the plan and then stay in existence until all benefits are distributed. This might not be realistic if the seller's plan is a large plan. Also, if it is important to make the transition as seamless as possible for employees, your recommendation might not be practical. Finally, I'll note parenthetically that the problems you mention are the same problems which could occur if this were a merger or a stock acquisition rather than an asset sale, it's just that in a merger or stock acquisition the buyer does not have a choice and is forced to deal with the seller's plans.