Termination of Profit Sharing Plan

[Guest JSinbad]

Currently, we have a profit sharing plan and we are being acquired. The company that is acquiring us has a 401(k) plan. What can we do with our profit sharing plan?

[Guest Dook]

Assuming that your company is being acquired as a wholly owned subsidiary, you will in all likelihood, not be able to continue activ operation of the profit sharing plan as a separate plan due to 410(b) coverage requirements.

Therefore, the options are to terminate the plan or merge it into the acquiring company's 401(k) plan. Termination requires 100% vesting for all participant accounts and the assets are then available for distribution to the participants. Merger does not allow for distributions to participants who are still employed by the company, and may or may not alter the vesting on participant accounts.

The answer is usually driven by the desires of the acquiring company and whether they want to go through a full 411(d)(6) review of your plan to determine if any rights and benefits under your plan would need to be grandfathered or continued under their plan.

In my experience most companies would rather not get involved in a plan merger if it can be avaoided, unless the assets of the plan to be merged are of sufficient size to impart some benefit (i.e. reduced asset charges or administrative costs) on their plan.

[richard]

Whether or not your profit sharing plan is continued should be a business decision. Will having a separate plan for your "division" be good or bad for the company that is acquiring you? Would it be good of bad for you? Should your division and the acquiring company have different benefits?

Those are questions that you and they need to address, from a business viewpoint. The coverage testing issues are usually not a big problem unless your company or the acquiring company is very small, or if either company has a disproportionate portion of high paid employees (i.e., employees earning over $80,000 per year).

Merging a profit sharing plan into a 401(k) plan is not (or should not be) a big deal. Some decisions need to be made, some care needs to be made about its timing and the communications to employees.

Terminating the plan does require 100% vesting (which has a cost), but does allow the acquiring company to "lay to rest" the profit sharing plan of your company. Again, whether this is desirable is a business decision.

Enjoy

[Guest derek]

Something that tends to get in the way of merging plans are the provisions of 411(d)(6) which protect certain types of benefit payments. Many sponsors just don't want the additional administrative burden of recordkeeping a plan that may have some protected benefits that require additional recordkeeping work.