Stock sale - plan issues not addressed in purchase and sale agreement, etc., of course...

[Belgarath]

So, corporation A purchases 100% of corporation B in a stock sale. Both corporations sponsor a 401(k) plan. 2 weeks after the sale, they now decide to look at the plan issues.

So, clearly a controlled group now. Corporation A crediting service with Corporation B, etc., etc.

Corporation A wants to now terminate Corporation B plan. But this brings in successor plan rule. How is this mess typically dealt with? 

[EBECatty]

Usually one of three ways:

1. Maintain both plans separately

2. Merge the plans

3. Go back in time

[Belgarath]

I love #3! As to #1, do you often see the plans maintained separately, then they merge as of the beginning of the next plan year? (Say, 1/1/2025) Seems kind of late to merge currently.

Thanks.

[Paul I]

Merge the plans, and transfer the assets from the B plan into the A plan (preserving all of the separate sources and protected benefits).

There are a lot of potential land mines in this process.  Before taking any action, be sure that the controlled group is passing coverage testing and nondiscrimination testing.  If it isn't passing, fix it before proceeding.  If the benefits or eligibility requirements available under each plan differ considerably, the fix could be expensive - but the deal is already done so A is committed to cleaning things up.

Passing post-merger coverage testing also will help answer whether A wishes to continue provide benefits to B employees.  If A is not so inclined, be sure the plan will continue to pass coverage with that classification exclusion.

A merger very likely will end the transition period safe harbor, so again, anticipate the impact this may have on particularly on ADP/ACP testing.

There are some quirks that often do not appear in discussions or commentary about mergers but they can have a significant impact.  For example, determining the HCEs is after the merger is done on the basis of the controlled group which involves considering how B employees' compensation in the look-back year is determined.  If one of the plans uses top-paid group rules, then neither plan can use the top-paid group rules.  This is just a sample.

Alternatively, A could freeze the B plan and have the B employees participate in the A plan.  That leaves A with maintaining 2 plans. 

Or, A could terminate the B plan and allow B employees to participate in the A plan, and then deal with the successor plan rules applicable to B employees (which is what you wanted to avoid.)

One last note, if neither plan is subject to an IQPA, then keeping the plans separate may be less costly administratively than having the A plan become subject to an IQPA.

[QDROphile]

To expand on "go back in time" (a great answer), a common approach is to terminate the plan of the acquired company before the closing of the acquisition and encourage the participants to roll over into the new plan. I am not a big fan of this, but it somewhat alleviates concerns about inheriting problems of the acquired company's plan and eliminates the grandfathering. I say "somewhat" because the acquiring company is probably stuck with the aftermath anyway (many plan participants will now be employees of the acquirer) unless unusual special arrangements are made for someone else (the stock sellers?) to be responsible for any post transaction problems. I don't like tempting participants to take distributions early because of the opportunity presented by the plan termination.