Alternative DC and Plan Acquisition

[Guest Pippy]

We're a registered investment advisor to a credit union (credit union A) acquiring another (credit union B). A is acquiring B on 10/1 and plans to terminated B's 401k plan effective 10/1 as well.

Since A currently maintains a 401k plan, is A's plan considered an alternative defined contribution plan to B's participants? If A moves the termination date up to 9/30, would A's 401k plan still be considered an alternative DC?

Any help is appreciated!

[jpod]

I assume the goal is to terminate the target's plan before the acquiring entity and the target merge or otherwise become part of the same controlled group, so that you can distribute the target plan's assets to participants even though they will participate in the acquiring entity's plan. The fiction which the IRS' regulations respect is that if you terminate the target company's 401(k) plan immediately prior to the closing of the transaction you will accomplish this goal. The fiction is that the act of termination is nothing more than an appropriate amendment to the target's plan and/or a resolution by the target's board declaring that the plan shall be terminated "immediately prior" to the closing of the corporate transaction, but then you can proceed to actually liquidate the plan's assets and distribute them to participants over how many weeks or months it takes to do so following the closing of the corporate transaction. So, there is nothing wrong with the termination to be effective as of the same date as of the closing, as long as the termination is effective "immediately prior" to the closing (e.g., one nano-second prior to closing). The lawyers for the deal should be overseeing this and making sure that the target's plan termination is handled appropriately.

[Guest Pippy]

Thank you, jpod. Yes, you assumed correctly. And yes, attorneys are involved; however, we've not been privy to the discussions. We've asked plan A's contacts to reach their attorney regarding the topic. Still, I cannot help my curious nature. Thank you for your time.

[jpod]

Not all corporate/deal attorneys are familiar with this need to terminate the target's plan immediately prior to closing. The transaction documents should specifically require it as a condition to closing.