PARTICIPANT VESTING IN MERGERS AND SAME DESK RULES VERY ODD SET OF HAP

[Guest ACM]

Employee of company "A" resigns to work for company "B"in a like employement postion. At his date of termination from “A” he is 80% vested (six years of service) in the company “A” 401(k) plan and takes both EE and ER vested matching funds in an IRA rollover. After six months at company "B" he enters the company "B" 401(k) plan. 4 months later company "B" his current ER agrees to buy company "A" his former ER for stock. In the purchase agreement company "B" agrees to recognize all years of service for all employees at company "A". The transaction is completed 14 months after the employee left company "A" and joined company "B". However company “B” now says that only current company “A” employees will have prior years of service credited. We contend that since the employee went from A to B directly, the employee should be credited with all years of service at both A and B and therefore 100% vested in all ER contributions. Any ideas? Is this not common? It would not be a major concern however the outcome is $15,000. to the participant.

[KJohnson]

Sounds like more of a plan language/document question. I would get the actual langauge of the plan or adoption agreement granting the prior service credit as well as the SPD or SMM to see if they have placed restrictions on providing credit to only those employees employed on the day of the "deal".

[Alf]

They almost certainly meant to give credit only to those employed on the date of the sale. Although the actual language of the amendment may be broad enough to include these coincidental transferring employees, I doubt it.

414(a) might help you. It provides rules dealing with service for predecessor employers.

[pjkoehler]

You should carefully review the language of the acquisition agreement in which company B (buyer) covenants to amend its 401(k) plan to credit service for eligibility and vesting purposes for employment with company A (seller). You should also, of course, carefully review the language of the amendment itself. I have advised many buyers and sellers in similar transactions, and it was always considered commercially reasonable to limit the scope of the buyer's covenant to affect just those employees who were employed by Company A on the date the transaction closed. It would border on malpractice if the attorney drafting the acquistion agreement didn't include language that limits the plan amendment in some fashion. Otherwise, any time company B hired someone who happended to work for company A in the past, it would have to credit such service under its plan. A result certainly not intended or reasonable.

[Guest Kathy Bayes]

The answer to this question may be dependent upon what happended to Company A's plan. I believe that if Company B continues to maintain the Company A plan, service with both Company A and B must be counted. However, the plan might exclude this employee from active eligibility in the plan. If the Company A and Company B plans are merged, then the Company B plan must count the service with Company A and/or B for all plan purposes, including restoring vesting service to a rehired employee if no 5 year break has occurred. These requirements are found in Code Sec 414(a) and require that service with a predecessor employer must be counted if the successor employer maintains the predecessor employer's qualified plan. The employee might have to pay the distribution back to the plan in order to get the forfeited account restored.

[Dowist]

I agree with kathy Bayes that if the plans are merged you'd have to count all service with both plans.

Also, wouldn't you now have a controlled group between A & B, such that service with B would count as service with A's plan, and vice versa - at least after they became members of the controlled group.

[Dowist]

I agree with Kathy Bayes that if the plans are merged you'd have to count all service with both employers in the plan.

Also, wouldn't you now have a controlled group between A & B, such that service with B would count as service with A, and vice versa - at least after they became members of the controlled group.

[card]

I have a similar situation. In my scenario, employee works for Company A. 5 year cliff vesting. Employee terminates with 4 years of vesting service and goes to work for Company B, an unrelated employer. Six years later Company A acquires Company B and Company B's DB plan is merged into Company A's DB plan.

Can Company A ignore the prior vesting service under the rule of parity? Or do the predecessor employer rules require Company A to count all service with Company B, effectively overruling the rule of parity?

(Kathy- I think your prior answer is correct except the 5 year break in service rule would not apply in that case because the employee is partially vested.)

Thanks-

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