Successor plan rule

[R.G.]

An employer maintains a 401(k) plan.  On June 1st there is going to be a stock sale in which the change in ownership is going from 60% owner A, 40% owner B to 100% owner A.  Owner A is being advised to terminate the current 401(k) plan and after the stock sale start a "new" 401(k) plan.  Would this be in violation of the successor plan rule?  The employer name and tax id is not changing. 

[Tom Poje]

I'm not sure why a change of ownership like that would necessitate a new plan

but as I recall, yes, because of the successor plan rule no one could take distributions, but the balances should be able to transfer to the new plan with no problem.

otherwise people would terminate a plan, get their $ out and then start a new plan whenever they felt like it, avoiding the  distribution rules relating to deferrals

[MoJo]

To answer your question, yes, there would be a successor plan - and the issue is as Tom points out - the establishment of a successor plan (withing the 24 month period beginning 12 months before the plan termination and ending 12 months after) would mean there would not be a "distributeable event" from the terminated plan for any of it's participants.

That would leave two options - 1) maintain the existing plan (and any evil it contains - which in my mind would be the only reason to consider it's termination); or 2) merge the plan into the new one (which would merge the evil into the new plan, tainting it).  Now, you arguably could give participants the option of leaving balances in the old plan or "rolling over" to the new plan (but not taking a distribution), but in effect, that is a "partial" merger of assets which a good lawyer could/would argue taints the new plan as much as a complete merger.

My recommendation:  If there is a problem with the existing plan - FIX IT.  Everything can be fixed - the only variable is the time and money it takes - but IF ITS BROKEN, IT NEEDS TO BE FIXED.

Then, don't worry about "termination" and new plan set up and successor plan issues....

[R.G.]

Thanks for the replies.  We're struggling to understand why that's the recommendation they are getting from their current provider.  This is a prospect for us and we're starting to wonder if there is something wrong with the plan, why else would they recommend handling it that way?  We thought the "new" owner would just continue to maintain the plan. 

[jpod]

In a stock acquisition where the buyer is an existing business with its own 401k plan it is almost always standard operating procedure to require the target's plan to be terminated prior to closing.  This is not that scenario, however.  I see two possible explanations here.  (1) The advisor is very green and not able to draw this distinction; or (2) there are in fact lots of problems with the plan and it is felt that this is an opportunity to stop the bleeding and allow the statute of limitations period clock to run, while at the same time starting up a fresh and clean new plan.   

[austin3515]

jpod took the words right of my mouth.  Smart-money is on explanation 1.

[RatherBeGolfing]

3 hours ago, R.G. said:

Thanks for the replies.  We're struggling to understand why that's the recommendation they are getting from their current provider.  This is a prospect for us and we're starting to wonder if there is something wrong with the plan, why else would they recommend handling it that way?  We thought the "new" owner would just continue to maintain the plan. 

I was expecting someone not connected to the current plan to be the one making that recommendation. I'm more concerned that the current provider is telling you to terminate and start over...  What don't they want you too find out?

 

[MoJo]

15 hours ago, jpod said:

In a stock acquisition where the buyer is an existing business with its own 401k plan it is almost always standard operating procedure to require the target's plan to be terminated prior to closing.

I'm not sure I agree.  In an "asset" acquisition, I would say it is typical for the acquiring company NOT to acquire the plan as part of the deal.  In a "stock" acquisition, in my experience, it is almost always the case that the plan is acquired, and merged into the acquiring company's plan.  There is a lot of variability here, and it seems that the smaller the acquiring company is, the more likely the plan is not merged - but I've found that that is because the attorney's handling it generally have no ERISA experience (and indeed, are afraid of it) and don't have "big firm" expertise on which they can draw.  That's where I come in - to provide some expertise so that a plan merger can occur - and we (a bundled and unbundled r/k firm) help by performing due diligence and corrective actions (including VCP filings) if necessary.

Bottom line - anything can be fixed.  Make that part of the "deal" and don't suffer the consequences of retirement plan drain by your newly acquired employees....

[RatherBeGolfing]

8 minutes ago, MoJo said:

I'm not sure I agree.  In an "asset" acquisition, I would say it is typical for the acquiring company NOT to acquire the plan as part of the deal.  In a "stock" acquisition, in my experience, it is almost always the case that the plan is acquired, and merged into the acquiring company's plan.  There is a lot of variability here, and it seems that the smaller the acquiring company is, the more likely the plan is not merged - but I've found that that is because the attorney's handling it generally have no ERISA experience (and indeed, are afraid of it) and don't have "big firm" expertise on which they can draw.  That's where I come in - to provide some expertise so that a plan merger can occur - and we (a bundled and unbundled r/k firm) help by performing due diligence and corrective actions (including VCP filings) if necessary.

Bottom line - anything can be fixed.  Make that part of the "deal" and don't suffer the consequences of retirement plan drain by your newly acquired employees....

I agree with you on asset sale vs stock sale above.  In OPs case where a majority owner (60%) simply buys out the minority owner to become 100% owner, I would not expect many changes at all, if any.

[jpod]

Our experiences differ I guess.  Mine is as deal counsel representing buyers and sellers in all sorts of m&a, and unless the target is going to be maintained with a separate benefits structure, the buyer will want to get rid of the target's qualified plans (except for an underfunded db plan).     

[K2retire]

53 minutes ago, jpod said:

Our experiences differ I guess.  Mine is as deal counsel representing buyers and sellers in all sorts of m&a, and unless the target is going to be maintained with a separate benefits structure, the buyer will want to get rid of the target's qualified plans (except for an underfunded db plan).     

Even if the buyer was already the majority owner prior to the sale?

[MoJo]

58 minutes ago, jpod said:

Our experiences differ I guess.  Mine is as deal counsel representing buyers and sellers in all sorts of m&a, and unless the target is going to be maintained with a separate benefits structure, the buyer will want to get rid of the target's qualified plans (except for an underfunded db plan).     

Define:  "get rid of" the target's plan?  I agree maintaining separate plans is often not tenable, but "termination" to get rid of it is vastly different than "merging" it, to get rid of it.  The former (if done correctly) causes (in my experience) significant leakage which generally results in an ill-prepared for retirement workforce - which can have real business consequences (older workers being more expensive to provide health benefits to, greater absenteeism, lower productivity, etc.).

[austin3515]

1 hour ago, MoJo said:

In a "stock" acquisition, in my experience, it is almost always the case that the plan is acquired, and merged into the acquiring company's plan.  

Not for me.  We terminate the day before the sale always and terminate.  Who wants to mess around with protected benefits and different vesting schedules and plans with 15 sources.  just a mess.

BUT in the original post, this is NOT an option.  There is NO change in Employer taking place in the original question.

[jpod]

Buyers aren't always that altruistic when faced with the risk, no matter how small, that the target's plan(s) could taint the buyer's plan(s).  The indemnification extracted from sellers typically won't last long enough to suit the buyers, so best to start the SOL clock on the terminated target plan(s) at closing.

[MoJo]

4 minutes ago, austin3515 said:

Not for me.  We terminate the day before the sale always and terminate.  Who wants to mess around with protected benefits and different vesting schedules and plans with 15 sources.  just a mess.

BUT in the original post, this is NOT an option.  There is NO change in Employer taking place in the original question.

Differences in philosophy, differences in result.  I ALWAYS try to preserve the benefits accrued by the employees acquired - and I explain why to my clients.  Nothing is so broken that it can't be fixed and nothing is so complicated that it can't be simplified.  If you terminate, you must vest up, so why not just vest them up anyway and not deal with the multiple vesting schedule issues?  Protected benefits?  Not too many to not deal with - and if they are good for the goose, they might be good for the gander as well.  Evaluate and make consistent.

It's a value add service to clients that they really appreciate.

[MoJo]

3 minutes ago, jpod said:

Buyers aren't always that altruistic when faced with the risk, no matter how small, that the target's plan(s) could taint the buyer's plan(s).  The indemnification extracted from sellers typically won't last long enough to suit the buyers, so best to start the SOL clock on the terminated target plan(s) at closing.

That's where the value of good "consulting" comes in.  Risks can be identified and managed.  Tell an employer that if the newly acquired employees won't be able to retire an any reasonable age and your health care premiums will SKYROCKET, and they tend to listen.

By the way, lost of information on the subject of the higher cost on non-retiring employees out there - mostly from the financial wellness purveyors.  Financial Finesse has been documenting this for a while.  Same is true for "leakage."

[austin3515]

10 minutes ago, MoJo said:

 I ALWAYS try to preserve the benefits accrued by the employees acquired - and I explain why to my clients.

My clients almost across the board want what is best for them in these situations.  And I can't say I blame them since the Employer presumably is giving them a nice benefit going forward, and they are not taking anything away from the employees - who by the way can roll their money over to the acquirer's plan if they choose.

Now listen, if I was talking to a national business of course I would walk through all of the options.  But company A with 50 people buys Company B with 10, I'm terminating B's plan every day of the week (and would explain why A would be "crazy" to agree to assume any past transgressions that B might have committed unkowingly)...

[MoJo]

1 minute ago, austin3515 said:

A would be "crazy" to agree to assume any past transgressions that B might have committed unkowingly)...

That's why there is such a thing as "due diligence" and why including pro's in the process is essential.

We all know only a fraction of distributed assets are rolled-over.  It is what it is.  I work with my clients to provide the best option - and in my mind, that is merging - unless there is a really, really good reason not too.

[austin3515]

2 minutes ago, MoJo said:

That's why there is such a thing as "due diligence" and why including pro's in the process is essential.

Company A does not want to pay you $500 an hour (or me $15 an hour :)) to dig up documents for the last 12 years that the IRS might be asking for under audit.  Needless to say both of us deserve to be paid for the value we bring to the table!  Were those ADP refunds paid 5 years ago?  How that top-heavy calculation for 2014? Was it done right? Company A has a lot of widgets to make and would rather use all that due-diligence expense to pay off the seller!

[MoJo]

1 minute ago, austin3515 said:

Company A does not want to pay you $500 an hour (or me $15 an hour :)) to dig up documents for the last 12 years that the IRS might be asking for under audit.  Needless to say both of us deserve to be paid for the value we bring to the table!  Were those ADP refunds paid 5 years ago?  How that top-heavy calculation for 2014? Was it done right? Company A has a lot of widgets to make and would rather use all that due-diligence expense to pay off the seller!

I work for a bundled service provider.  From the client's perspective, I'm free.  The issues you raise are easily discovered, and fixed.  Its a small investment of time up front to cement a longer lasting relationship where we are perceived of as a "trusted advisor" and not simply as a vendor.

It works even better the other way around - when a current client is acquired.  Our success rate at keeping and expanding that business is extremely good.

[austin3515]

2 minutes ago, MoJo said:

The issues you raise are easily discovered, and fixed

Yeah, I am going to have disagree with you on that point.

[MoJo]

Just now, austin3515 said:

Yeah, I am going to have disagree with you on that point.

Well, OK.  We disagree.  I find and fix them virtually all the time - and not just in M&A business, but with respect to ALL new business that comes in the door.  Last year, we on-boarded about 450 new plans - and every one of them was reviewed through the process....