Acquisition

[truphao]

My client that is sponsoring a defined benefit plan is considering an acquisition of another business.   In scenario 1 the purchaser makes 100% cash deal and pays $3,000,000.  In scenario II the purchaser pays $500,000 and covers all employees  of the acquired company in the DB plan granting past service back to original date of hire with the seller.  Lets assume that the value of the accrued benefits one day after the deal is $2,500,000.   How does the Scenario II impact the taxation from both the buyer and the seller perspective?  How is the Form 8594 prepared to report the transaction?  Are there any other considerations?   All the coverage, non-discrim, participations, etc. issues before and after the transaction are non-issue.   Thank you in advance.

[shERPA]

This is way beyond free general advice apropos an internet message board.  They need to engage professionals to do the analysis.  When it comes to taxation, retirement plans and M&A, nothing works independently, there are always "other considerations", and they are specific to the situation.   Just my opinion.  

[truphao]

Totally agree however I am trying to develop a conceptual understanding rather than receive a technical advise.   Basically, I am trying to get myself to a level of understanding of what to ask a tax advisor.

[mphs77]

Is the seller one of the employees who are to receive the $2,500,000 in accrued benefits?

If so, how much?  Will the benefits going t other Employees exceed the taxes that would

have been paid if the transaction was completely cash?

 

Inquiring minds want to know.

[truphao]

yes, the seller is one of the employees.  The benefits going to other employees are not larger than a potential tax saving.   From purchaser perspective it makes sense since the purchaser DB is really well funded on ongoing basis (almost 100% funded on termination basis).  From the seller perspective it is desirable as well as a way to shift the taxation to a personal level on deferred basis (via receiving DB payments in future).   Am I getting the concept correctly?   How one would report it on 8594?

[Luke Bailey]

truphao, have you determined that the benefits for the seller's employees (including the seller) can be paid from the plan? Seems to me like Section 415 of the Code is going to limit what you can do.

[Effen]

Also don't forget about discrimination testing.  If you are granting more than 5 years, you need to demonstrate that it is not discriminatory.

[CuseFan]

On 10/30/2020 at 7:47 PM, Luke Bailey said:

Seems to me like Section 415 of the Code is going to limit what you can do.

Exactly, because granting past credited service for benefit accruals does not provide any additional participation service for (proration of ) 415 limit - good call.

[truphao]

thank you, guys, great points.   Fortunately, neither 415 nor non-discrim are getting in a way.  Truly appreciate all the comments.