M&A - terminate buyer's plan?

[casey72]

In a stock acquisition, often a buyer requires target/seller to terminate target's 401k plan pre-closing. Can a buyer instead choose to terminate its own (buyer's) plan pre-closing and join the target's plan post-closing? Or does this run afoul of the successor employer / alternative defined contribution plan rules?

[CuseFan]

Buyer sponsors plan, terminates plan, then becomes sponsor of acquired plan. Yes, I think you have successor plan situation. Can they terminate, sure, but that won't be a distributable event.

Why not merge plans - what is the aversion? I understand not wanting potential compliance liability for acquiring someone else's prior mistakes, but isn't that part of due diligence and indemnifications? In your situation, if the buyer is willing to sponsor the plan of its acquisition, why would it not want to merge? Unless buyer knows its plan has issues and wants it to go away? 

[Artie M]

This would be an issue.  You can terminate the target plan because it was maintained by a different Employer (capital "E" controlled group employer).  The buyer adopting the target would have a second plan (the alternative defined contribution plan) of the same employer (don't even have the controlled group issue).

[david rigby]

Wow, this situation raises more than one red flag.  Asking if it can be done should come after someone asks lots of questions, the first of which is, "why do you want to do it that way?"  @CuseFan poses a very good question:  "...buyer knows its plan has issues and wants it to go away?"

[casey72]

Exactly, perhaps buyer's plan has lots of issues....

is there an argument that the pre-closing controlled group of buyer is different than the post-closing controlled group of buyer (bc now target is in it), such that the capital "E" employer has changed? 

[CuseFan]

Buyer is still sponsor. Buyer's plan issues, if any, do not automatically and instantaneously go away either, so perhaps the buyer should do the proper thing and address/correct compliance issues and then merge the plans. If issues were due to buyer's deficiencies, controls and procedures should be put in place so same doesn't happen with merged plan. If issues were due to buyer's plan provider/recordkeeper, then maybe target's plan provider should service the merged plan or at least until an RFP can be run for new provider.

[casey72]

The question is not why a buyer would terminate their plan or whether they should. 

The question is whether a buyer can avoid the successor plan rule in the same way that a target can by terminating its plan pre-closing. If Group ABC (buyer, which sponsors a plan) buys Group DEF (target, which also sponsors a plan), forming Group ABCDEF, why would this new group be viewed as a new "employer" with respect to DEF, but not a new "employer" with respect to ABC?

We all agree that the rules say Group DEF can terminate its group's plan pre-closing and join the ABC plan post-closing without creating a successor plan issue. 

But where do the rules say that ABC cannot terminate its plan pre-closing (and distribute funds) and join the DEF plan post-closing due to the successor plan rules? 

[Artie M]

If the employer adopts an alternative defined contribution plan within 12 months after all distributions from the terminated plan.... (assume more than 2% of employees will participate).  Treas. Reg. 1.401(k)-1(d)(4)(i) states:

No alternative defined contribution plan. A distribution may not be made under paragraph (d)(1)(iii) of this section if the employer establishes or maintains an alternative defined contribution plan. For purposes of the preceding sentence, the definition of the term “employer” contained in §1.401(k)-6 is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash or deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan. In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).

If ABC terminates its plan pre-closing, distributes funds, and joins the DEF plan post-closing (assuming the adoption of the new plan is within 12 months from the final distribution of funds of ABC plan), the DEF plan will be a successor plan such that the funds distributed due to the termination of ABC plan would be impermissible distributions under the -1(d)(4)(i). 

 

[casey72]

Thanks Artie M. Whether that reg applies depends on whether pre-closing buyer (ABC) is the same "employer" as post-closing buyer (ABCDEF) for purposes of the rule. We are all comfortable that DEF is a new "employer" when it joins ABC, which is why it can terminate its plan pre-closing and join ABC's plan post-closing. Is there a reason that we are not comfortable that the same is true for ABC when it acquires DEF (such that it can likewise terminate its plan pre-closing and join DEF's plan post-closing)? There may be a reason, but I was hopeful someone would have a citation/support.

[Peter Gulia]

If the buyer seeks to manage the risk that the rule mentioned might apply and might tax-disqualify one or more plans or § 401(k) arrangements, the buyer might consider:

Obtaining a law firm’s written opinion that, on the draft deal documents and plans’ documents and other assumed facts, the outcomes would be as casey72 suggests; and

Buying tax insurance against a failure of the desired outcomes.

This is not advice to anyone.

[Paul I]

@casey72's question essentially asks whether the identity of the buyer changes as a result of the acquisition, i.e., is the buyer after acquisition not the same as the buyer before the acquisition.  In a stock acquisition, the buyer after the acquisition is the same as the buyer before the acquisition.  The first place to look for confirmation is whether the buyer's EIN changed as a result of the acquisition.

Going back to the OP and @CuseFan's first comment, you can get to where you want to go by completing the stock acquisition and the buyer can merge the two plans without violating any successor plan rules.  Why keep harping on a termination of either plan unless for some reason the buyer wants to use the acquisition as an excuse to take distributions now from the buyer's plan?  The successor plan rules are there to discourage plans trying to skirt distribution and withdrawal restrictions by using a terminate-distribute-reestablish strategy.

Some things are clever, and some things are too clever.

[casey72]

Thanks. I'm not sure EIN is dispositive as to whether the buyer is a new "employer." The target's EIN could easily stay the same post-closing, too, and it's considered a new "employer." 

[Artie M]

While researching something else I saw this today.  This may not be directly on point because of the structure of the transactions under the facts of PLR 9836028 but note the precise use of the terms seller and purchaser and the one way nature of the interpretation by the IRS in this excerpt from the PLR.

Section 1.401(k)-1(d)(4)(i) of the Regulations provides that (i) the seller must maintain the plan. A distribution may be made under section 401(k)(10) and paragraph (d)(1)(iv) or (v) of this section only from a plan that the seller continues to maintain after the disposition. This requirement is satisfied if and only if the purchaser does not maintain the plan after the disposition. A purchaser maintains the plan of the seller if it adopts the plan or otherwise becomes an employer whose employees accrue benefits under the plan. A purchaser also maintains the plan if the plan is merged or consolidated with, or any assets or liabilities are transferred from the plan to a plan maintained by the purchaser in a transaction subject to section 414(l). A purchaser is not treated as maintaining the plan merely because a plan that it maintains accepts elective transfers described in sections 1.411(d)-4, Q&A-3(b)(1), or rollover contributions of amounts distributed by the plan (including distributions that the recipient elects, under section 401(a)(31), to have paid in a direct rollover to the plan of the purchaser).

 

 

[casey72]

Thanks for the follow up! FYI, I looked into this and that language in the 1998 PLR was verbatim the language in the regs at the time in 1998. That reg has since been removed.