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Company sold to an Investment Group - effect on 401k Plan


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I just got a call from the plan sponsor's controller.  The company was purchased by an Investment Group.  the current owner is retiring.  It is my understanding that they bought the stock and not just company assets.  the company has sponsored a 401k for many years, and is a large audited plan.  The corporate attorney sent an email to the controller saying ' the sale is final today - notify payroll and the TPA to shut the plan down today."    Geez - apparently no thought was given to the 401k during the sale negotiations.    I got the impression that the Investment group will not be sponsoring a 401k but I don't know why they would want to terminate this benefit for 100's of employees.  Anyway, I am not an attorney, but need some guidance.   It is my understanding that whenever a plan terminates, there must be notices sent out (like 30 days?) and the plan amended to current law.   I assume the new company (investment group) has the right to terminate the plan, but I don't think they can just shut it down as of today.   Thoughts and advice from you who have dealt with this type of mess/opportunity before.  Thanks for any insight.

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Generally plans can be (and often are) terminated in connection with a sale without any prior participant notice. Of course, it's always better to have a clear approach going into it so everyone is on the same page. There may have been one that has not been communicated to you (not sure your role in the process). 

If the plan was not terminated by a resolution effective before the stock sale closed, there will likely be a successor plan issue as I assume the buyer (or another member of the buyer's controlled group) has or will start a 401(k) plan. The seller's plan may need to be merged into a plan of the buyer. 

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Pammie57, completely agree with EBECatty, but if for some reason they really don't want to cover these employees with a 401(k) for a year, even just deferrals, they can terminate it.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 5/1/2021 at 12:44 PM, Gilmore said:

I always wonder in these situations if the Investment Group owns other companies and now the new company is part of a controlled group.

Yes.  I've seen that many times (and often, as sophisticated as the investors are, they often ignore this aspect of plan sponsorship.)  I worked with an advisor who worked with a private equity firm, and the solution was to create identical plans for each member of the tranche  and aggregate.  For the larger companies (in a separate tranche, it may be possible to not aggregate).  Lots of complexity.... (i.e. high fees).

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Almost certainly there will be other companies owned by the PE fund or investment company. Whether the operating companies are affiliated can be more complex. 

Some investments may be less than 80%. Some may be through parallel investments, which has been subject to some scrutiny in Sun Capital. Some may qualify as QSLOBs. Generally the fund will be a pass-through entity, so technically the controlled group of corporations rules in 414(b) don't apply, but rather the trades or businesses under common control rules in 414(c). There is a fairly widely held position, at least in the PE context, that because the fund (common owner) itself is not a "trade or business" that the entities it owns are not related. There's also some skepticism of that position based on the wording of the regulations. 

In my experience, many PE funds don't have the capacity (or desire) to test across all their platform companies.  

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