Merging 401(k) Plan

[52626]

Company A will be acquired by Company B over the next couple of months. In lieu of termination Company A's 401(k) the plan will be merged into Company B's 401(k) Plan.

The Trustess of Company B want to know if after the merger, do the Trustees of Company B have complete liablity for Company A's Plan. For example, if there it was discoverd, there was an operational error in a prior plan year, are the Trustees of Company B held accountalbe, or does this fall back to the prior Trustees.

Are they any other issues the Trustees need to address prior to merging the plans??

[Bill Presson]

Do they have liability, yes. But most of the impact of the liability can be addressed in the purchase agreement assuming both parties want that hanging out there for a number of years. We've merged only a handful of plans in my 30 years in this business because of this issue. 99% of the plans in this same situation will terminate prior to the sale.

[QDROphile]

There are diferent answers depending on your interest in (i) fiduciary liability for which a fiduciary may be personlly liable, or (ii) plan qualification matters, which in the end are usually the obligation of the plan sponsor of the surviving plan.

[ESOP Guy]

My understanding is if the plan were disqualified that would taint the recieving plan.

In fact I have know a good number of ERISA attornies that recommend against mergers just for this reason. I also used to work for a large consulting company that had a good size due diligence practice. For larger employers where merging is the norm they would hire us to review the plan to see if it might have a problem.

[MoJo]

Generally, a fiduciary has no liability for those actions that took place prior to their becoming a fiduciary (and I would argue that that applies in the case of "acquired" plans) BUT a fiduciary has an obligation to find and correct mistakes that may exist (the "knew or SHOULD HAVE KNOWN" standard) - the failure of which is a breach of their own fiduciary duties. A good "indemnification" provision in the purchase agreement is always recommended, but it is NEVER a substitute for a thorough due diligence process BEFORE the acquisition, and on-going AFTER the acquisition.

Indeed, while my preference is to merge plans (rather than terminate one before the acquisition - as we all know assets will leave and participant will spend and few will be "retirement ready"), I have been know to have the acquirer delay the merger of plans until it can be thoroughly vetted - and I've even had an employer maintain two plans - the active one for all current employees and a "frozen" one that would contain suspect or "dirty" plans acquired - just to prevent one from tainting the other (and that happened with a Fortune 50 company that acquired companies with plans about as often as I change my socks...).