Business acquisition - merge or terminate plan

I need to have the plan sponsor clarify if they are being acquired through stock purchase or asset purchase.  I believe if asset purchase, employees of the acquired company are considered terminated and the plan can terminate and distribute.

But if corporate merger through stock purchase, my understanding is employees are not considered terminated and that the acquired company plan can either be merged or terminated but 401(k) elective deferrals may not be distributed since there is a successor plan.  I'm questioning if even safe harbor and profit sharing can be distributed since employment has not terminated and thus no distributable event and so perhaps the entire plan must merge into the acquiring company plan.

Your comments are appreciated!

Tom

Generally, you are in the ballpark.  The biggest issue is, if the transaction is an asset purchase, the seller's plan should be terminated before closing to avoid the same successor plan issue for stock purchase.  Note that the termination must occur before closing but the distributions do not have to be completed before closing.

There can be many other topics for the seller to consider going into the discussion/negotiation with the buyer in an asset sale.  Here are some examples:

• How long will the seller continue to exist after the sale?
• If there are outstanding loans to participants in the plan, will they become due upon the termination of the participant?
• Are there any last day rules or service rules in the seller's plan that could cause participants to lose out on current year benefits?
• If the buyer's plan does not have immediate eligibility/entry, can there be an accommodation to allow the newly hired, former seller's employees early entry?

This is a very small sampling of the potential issues for an asset purchase and doesn't get into issues for a stock purchase.

No question is too trivial to ask, and seek advice and counsel from those who will have in mind the best interests of the seller.  The seller should have answers for all questions before signing off at closing.

And read carefully (if completed), or negotiate, the business-deal documents’ provisions about employee-benefit plans.

For example, even if nothing in ERISA or the Internal Revenue Code precludes merging an acquiree’s plan into an acquirer’s plan, an acquirer might be unwilling to allow a merger of plans.

59 minutes ago, Paul I said:

The biggest issue is, if the transaction is an asset purchase, the seller's plan should be terminated before closing to avoid the same successor plan issue for stock purchase.  Note that the termination must occur before closing but the distributions do not have to be completed before closing.

I disagree with this. If it's an asset purchase, the seller will continue on and can maintain their plan with no impact on the buyer's plan (old or new) whatsoever.

@Bill Presson you are correct... my bad... should not have said asset purchase.