401k Plan Termination due to Sale of Business

[Renee H]

I found out yesterday the sale of my client's business is set to close escrow on September 30.  They sponsor a 401k/PS plan with safe-harbor matching contributions.  I am not privy to all of the details but here is what I do know:

1.  Sale of the business is set to close on 9/30/26.

2. The sellers have not notified their employees of the pending sale.

3.  The buyer sponsors a 401k plan with basic match only (no non-elective contribution).  They do not wish to merge the sellers plan with theirs.

4.  Assuming escrow will close on 9/30, all employees (approximately 40) will terminate employment and be given the option to work for the buyer's company.  I do not know how much notice they will give them.  I "assume" they will be given the option to roll their benefits to the new company's plan.

5.  The sellers do not wish to apply for IRS approval of the plan termination.  We use CalcAire's pre-approved documents.

6. The sellers wish to establish a termination date to coincide with the closing of escrow.   I don't think they can do this based on notice timing requirements.

What is the earliest date they can terminate the plan after close of escrow?  Is the 60 day notice of intent to terminate still applicable under these circumstances?  I recall reading 15 day notice is only required for DC plans but I am unable to cite where I read this.  I will take all necessary steps to terminate the plan per IRS guidelines.  I'm just not sure when to proceed since they do not know when escrow will close and there is the off chance the sale will fall through.  

Based on the limited amount of information I have available, how do some of you think this should play out?  

Thank you in advance.

[david rigby]

Based on (4), it appears this is an asset sale.  Is that correct?  (If so, the phrasing in Item 1 is not necessarily incorrect but is inconsistent.)

[Peter Gulia]

Before you begin work, consider getting your lawyer’s advice about what your service agreement obligates, permits, or precludes.

Unless you are the plan’s administrator or other fiduciary, consider that a decision about whether and when to discontinue or terminate an employee-benefit plan belongs to the plan’s sponsor, and decisions about how to implement a discontinuance or termination belong to the administrator or other fiduciary.

If your client asks for your advice about what to do with the retirement plan (and you’re willing to provide advice), consider explaining that you’re not ready to provide advice until you’ve read all documents about the business sale and any related deals.

Consider reassuring your client that you’ll keep all information confidential. And that you’d communicate only with your client, or, if so authorized, with your client’s lawyer.

Deal documents often include a seller’s representation, warranty, and covenant that every employee-benefit plan was ended before the sale of the business (in whichever form). A seller’s delivery to the buyer of a further assurance of each plan’s termination often is a closing condition.

2)    If 5½ weeks before the closing, a seller has not told its employees about a pending sale, that might be deliberate.

4)    Consider that the buyer’s retirement plan might not accept a rollover-in contribution. Likely, you don’t yet know.

6)    Although an intended safe-harbor plan design might control how the plan allocates one or more kinds of contributions, that might not by itself preclude a plan “termination” (really, a discontinuance) at a desired time before the closing of the business sale.

Consider 26 C.F.R. § 1.401(k)-3(e)(4) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-3#p-1.401(k)-3(e)(4).

If safe-harbor treatment is not met, a plan’s administrator might apply a plan’s provisions for coverage, nondiscrimination, and top-heavy measures (and related reallocations and corrective distributions).

Remind your client to get its lawyers’, including an employee-benefits lawyer’s, advice.

This is not advice to anyone.

[bp parv]

I'd like to reiterate the points made by @Peter Gulia and @david rigby. As TPA (I assume that is your role) please allow the client's attorney/client to instruct you on how they wish to treat the seller's 401(k) plan pursuant to this transaction. Reach out to them, and ask for the directive. You have stated some facts, which as pointed out by @david rigby may be inconsistent. For example, the seller's employees are "terminated" on the effective date of the stock sale. While this could happen in a stock sale, it would not be solely as a legal consequence of the stock sale itself. This suggests that the transaction is being structured as an asset sale. But, it's not clear.

Also, if the seller's 401(k) is a SH plan, the seller may terminate the plan without the 30 day notice if the termination is in connection with a "qualifying corporate transaction" such as an asset sale or stock sale.  See Treasury Regulation § 1.401(k)-3(e)(4).

My point is--get your directive from client/attorneys, not the other way around.

 

[Paul I]

I, too, agree with the information provided to you by our BenefitsLink colleagues.  I will add a word of caution.  If the client does not know the answer to the question about whether the sale is an asset sale or a stock sale, then you should encourage the client to find out asap. 

If the attorneys on the buyer's and seller's side of the transaction have not provided information about the type of sale, whether the seller will continue to exist after closing, whether the seller's plan will continue to exist after closing, and other similar information needed for the seller's plan to chart its path forward, then point out to the client that they need a clear road map of steps to take regarding the termination or possibly the continuation of the their plan.

All too often, sellers, buyers, and M&A attorneys focus on the closing without regard to the decisions and details needed to have an orderly transition of the plan.  This lack of planning can trigger unintended consequences for the buyer, the seller and the seller's employees that could require expensive remedial actions and override any goodwill that may have existed among the parties involved.

An ounce of prevention...

[Peter Gulia]

If the seller, with its lawyers’ advice, lacks information about what must, should, should not, or must not happen with a retirement plan, recognize that a lawyer too might face gaps in information from her client and restrictions on the scope of her work.

If the law firm representing the seller in a business deal lacks an employee-benefits practice, the standard recommendation is to bring in an employee-benefits lawyer. But many sellers decline to engage, or allow the business lawyer to engage, an employee-benefits lawyer. Or, even when an employee-benefits lawyer is available, a client might have instructed its lawyers not to consider employee-benefits issues, or to avoid negotiating anything that might slow a dealmaking.

Failing to consider employee-benefits issues and consequences can happen even when every professional acted correctly, each considering the scope of her engagement.

Consider that if 5½ weeks remain, there might be an opportunity, without upsetting the business deal, to resolve what ought to happen in ending the seller’s retirement plan.

This is not advice to anyone.

[Artie M]

Generally speaking, terminating the plan at closing by September 30 should not be a real issue.  Seller should adopt the termination resolutions and amendment before closing, effective September 30 subject to and contingent upon closing. Note that legally terminating the plan does not mean that all the amounts must be distributed by that day, etc.  Basically, what would occur is that on and after that date of termination there would be no additional contributions or participants.  The plan participants' accounts would, however, to the extent not vested, be 100% vested as of that date (SH so should already be vested).  The plan also would still have to be administered until the distributions are made. 

In an asset sale, the seller normally remains the plan sponsor after closing. The transferred employees generally incur severances from employment with the seller, potentially creating distributable events independently of plan termination. The seller doesn't lose authority over the plan in the way it usually would in a stock sale so it can continue administering until all amounts distributed, but the transaction agreement should address final contributions, payroll data, loan administration and post-closing costs.  

Neither ERISA nor the Code generally requires this type of plan to give participants a specified advance notice merely because the employer adopts an amendment terminating the plan.  (204h applies to DB plans or MPPs when benefit accruals are significantly reduced, but not to ceasing contributions under a 401k/PS plan).   Under your facts, no 204(h) notice, no separate 30-day SH suspension notice assuing the termination qualified under the transaction exception, blackout notice only if the RK will impose an actual terporary freeze exceeding 3 consecutive busines days and at the distribution stage, participants must receive the usual §402(f) rollover notice, direct-rollover election, §411(a)(11) consent notice, where applicable, QJSA notice and consent, if the plan is subject to §417; and loan-offset information, including qualified plan loan-offset treatment if applicable.  SMM will be needed but practically speaking issue a combined termination/SMM notice before closing communicating the termination to the participants and that likely would suffice. 

Separately, termination of the seller’s entire workforce should be reviewed under WARN and applicable employment-notice rules, but that is distinct from your 401(k) notice question.

[Renee H]

Thank you everyone for your excellent advice.  I found out it is a stock sale and the plan will continue at least until the end of the year.  

I may pop in again on this topi when I know more details.

[david rigby]

37 minutes ago, Renee H said:

I found out it is a stock sale, and the plan will continue at least until the end of the year.  

Consistent with the excellent advice above, a stock sale will generally mean the buyer is in charge of the plan after the transaction closes.  Of course, the buy-sell agreement may address some specifics.  One specific is vesting: under the plan termination scenario, all participants become 100% vested; but under the stock sale scenario, the participants will not automatically become vested at closing, unless specified in the buy-sell and/or a plan amendment adopted prior to the closing.  It is common (and highly recommended, by me) to include language in the buy-sell and/or plan amendment to provide such 100% vesting.  If someone objects, it is a very simple task to determine the cost of such provision.  Over 40 years of such transactions, I've never seen one where such cost was deemed "too much", including prior to 1989 when many plans used 10-yr vesting.  Also, to omit such vesting provision will likely lead to some bad PR issues. 

The recommendation from @Peter Gulia to include consultation with an EE-benefits lawyer is exactly correct and strongly recommended.

[Artie M]

it is also common in a stock sale that a buyer will want the seller to terminate its 401k plan immediately prior to closing.  See 401(k)(10)(A); Reg. 1.401(k)-1(d)(4)(i).... a 401(k) plan termination does not permit distribution of elective deferrals if the employer (determined on a controlled-group basis) maintains or establishes an alternative defined contribution plan, subject to the regulatory exceptions. So after closing, if the 401k is not terminated, it generally would nave to be merged into the buyer's 401k (assuming they have one).   Also almost everyone vests, the contributions have already been made and the loss is just the forfeitures that may be generated in the future (SH plan so the matches are already 100% vested).