Merger Question

Two employers participate in a plan under one company. If a client is going to acquire one of those companies, what are the options for the 401(k)? They can't merge the whole plan into theirs since there is another employer, correct? Is the only option to terminate those employees from the sellers plan and let them roll over into the buyer' plan?

The seller could consider a spinoff.  This most likely makes sense if the buyer wants to merge the spinoff into its own plan.  There are pros and cons with this (or any other) process.  (I won't list all the pros and cons here; that's a consulting project for which I would not get paid.  In the meantime, you can give yourself some more background by searching these Message Boards; try a search word like "merge" or "spinoff".) 

In addition, there are other employment-related issues associated with any buy/sell arrangement, and those should be discussed in advance.  The buyer and seller should (separately) engage competent ERISA counsel, preferably with M&A experience. 

Hi Khn:

Corporate transaction agreements generally contain provisions dealing with the treatment of employee benefits plans. I would first look at the reps and warranties dealing with employee benefits in the transaction agreement to determine if the parties have already decided on what actions they wish to take with respect to the seller's 401(k) plan. In general, post-transaction, the employees of the seller are deemed to have "terminated" from the controlled group that sponsored the 401(k) plan. This results in a distribution event under the 401(k) plan. Those participants may receive their account balances in any form that is otherwise available to them under the plan, as if they had terminated employment. The important point here is that the parties cannot require the participant to roll over their account balance to the buyer's 401(k) plan. On the other hand, the parties could decide in the corporate transaction agreement to "spin-off" the account balances of those employees of the selling company that is to be acquired, and have those spun-off assets merged into the buying company's 401(k) plan. In such event, the participant's are not really given a choice--their account balances are now part of the buyer's 401(k) plan (i.e., no distribution event).  Hope this helps.,

There are special timing rules that need to be followed if the participation of the sold organization is to be terminated from the existing plan, if you want to pay out the employees.  In particular, BEFORE THE TRANSACTION, the sold organization has to terminate its participation in the existing plan.  If it does, then you DO NOT spin off the portion of the plan, but you have distributions to the participants that are now part of the buyer's controlled group and they can roll over if the buyer so permits.

The alternative, particularly if the timing rule is not met, is to spin-off the sold entity's part of the plan, either into a separate plan or into the buyer's plan.  Be careful if the transition period is important to the transaction, because any amendment to a plan after the transaction causes the relevant plan to be subject to normal 410(b) testing (i.e., you lose the transition period).  This can get weird at times ....

Hope this helps. It's good to have ERISA counsel on an M&A issue, because it's not a walk in the park.  Just sayin' ...