Mergers & Acquisitions- Merging 401(K) Plans.

[Guest RichardLHill]

We have a client who recently acquired another firm, both corporations. They are trying to determine the best way to deal with the two 401(k) plans- terminate the acquired plan and distribute the assets to the participants or trasfer the assets from one plan to the other- anyone have a checklist we can use to guide them through this process? Principal is the administrator for the main plan. Thanks.

[david shipp]

Since you are dealing with a 401(k) plan you don't have full flexibility to terminate the plan and distribute the assets, depending on the nature and timing of the acquisition.

If the transaction was a stock purchase, and the transaction has been completed, the acquired company is now part of the controlled group. This means that the existing 401(k) plan (or any other non-ESOP DC plan of the purchaser) will be considered a successor plan if the acquired employees are allowed to participate in the existing plan within 12 months of the acquisiton (note that there is an exception if less than 2% of the acquired employees are allowed to participate).

Having a successor plan in existance means that distribution is not an option on plan termination. The assets must be transferred to the successor plan.

If the acquisition transaction involved a purchase of assets rather than stock, a distribution to participants could be possible if the plan contains the necessary language and the acquiring company is not considered to have become the sponsor of the plan of the other employer as a result of the transaction. (This generally assumes that the selling company still exists, independent of the acquiring company, and is maintaining the plan for remaining employees, at least in the short term.)

As you can see, there are a number of interpretive issues involved in the determination of options. It would be best to have the plan's tax counsel involved in the determinations. Allowing distributions where not permitted can have some fairly unfavorable consequences.

[Guest ESOPwizard]

Terminate the plan administered by the Principal and move the assets

to the other plan.

[david shipp]

Esopwizard,

assuming plan termination and transfer to the remaining plan, based on the info provided, is there an advantage to terminating one plan over the other? (or is there a bias showing here? :-))

[Guest bswift]

you're going to have to do a 411(d)(6) analysis no matter what before you transfer assets. For example if the transferor plan has annuities and the transferee plan does not, then you'll have to amend the transferee plan to provide for annuities. You'll also have to look at issues like normal and early retirement ages, etc. good luck.