Planning a company merger or an acquisition is complicated. Various factors need to be considered. Many times, the impact to your qualified plan(s) is overlooked. Once a transaction is finalized, it’s often too late and the impact to plans can cause dire circumstances. Mergers and acquisitions and the impact to the qualified plans involved require careful consideration and a proactive approach. Reach out to your BREA Plan Administrator for more information to discuss the right options for your plan(s).
Why do I need to be concerned? Can’t I just maintain both plans? Companies that form a controlled group or affiliated service group are required to test all employees in the group to determine if the minimum coverage rule is met. A plan must cover at least 70% of the employer’s non-highly compensated employees (NHCEs) or the percentage of covered NHCEs must be at least 70% of the percentage of highly compensated employees who are covered. Even if one plan satisfies this test, the other plan involved is required to satisfy the test as well. Typically, in a merger/acquisition situation, one of the plans will fail this test after the transaction.
Transition rules apply. Under IRC section 410(b)(6)(C), transition rules apply that say if the plans met coverage prior to the transaction, they are deemed to satisfy coverage during a transition period that begins on the day of the transaction and ends on the last day of the plan year following the year of the transaction. For example, assuming a December 31st plan year-end, if a transaction occurs on January 1, 2020, plans would be deemed to satisfy coverage through December 31, 2021. However, if the transaction occurs on December 31, 2019, the transition period only runs through December 31, 2020. Waiting one day may provide for an extra year in the transition period.
There’s a catch. If a significant amendment is made to either plan during the transition period, the transition period ends immediately. What’s considered significant? This is debatable. The recommendation is to not amend your plan(s) for any reason during the transition period.
Merger/Acquisition questions that need to be considered include:
- As a result of the transaction will the companies form a controlled group or an affiliated service group?
- Is the transaction a stock purchase or an asset purchase?
- Did the seller maintain a qualified plan? What type of plan?
- Was the seller’s plan terminated prior to the sale?
- Will the buyer recognize prior service with the seller for eligibility and vesting purposes?
- Is it the buyer’s intent to merge the existing assets of the seller’s former employees into the buyer’s plan?
- What does each plan document say regarding handling other companies that form a controlled group or affiliated service group? Does the plan provide that it covers all employees of the controlled group or affiliated service group as eligible employees?
The most common approach for a merger/acquisition situation is to merge the plans together. If notice is provided in advance many companies amend the plan documents in both plans to align their provisions in anticipation of the upcoming merger. Protected benefits need to be considered. Overall, make sure the plan provisions are updated to mirror your intentions to take full advantage of the transition period while you are considering the future of the plans.
Plan merger questions that need to be considered include:
- Do the plan document provisions align for testing methods and protected benefits?
- Will you be crediting service for eligibility and vesting purposes?
- How will the coordination of fundholders/recordkeepers be facilitated to merge plan assets? Will a blackout notice be needed? Will mapping be involved?
- Who will take responsibility for the final 5500 for the plan merging into the surviving plan?
- If a merger is taking place mid-plan year, how will compliance testing be performed? Options may include:
- Test everything in the surviving plan
- Test both plans through merger date and then surviving plan from the merger date through the end of the plan year
- Test disappearing plan for part of the year before merger, then test surviving plan for the full year, reflecting merged-in people as new entrants
- What if one plan is safe harbor and the other is not?
Most plan mergers run smoother if they are done at the first day of a plan year due to compliance testing reasons. Mid-year mergers of safe harbor 401(k) plans are very complex and at times impossible.
Proactive planning is key. Communicate with your Blue Ridge ESOP Associates Plan Administrator of any merger/acquisition that you are considering even if you are at the very early planning stage. Your plan administrator can help you navigate the impact to the plan(s) before any transaction and guide you through your options. Document planning with both plans involved is instrumental to facilitate a seamless merger. Choosing plan provisions in advance that allow for the most flexibility is ideal. Recommendations may be provided to amend one or both plans in anticipation of a plan merger; or to terminate the seller’s plan. Overall, careful consideration of the qualified plans involved is needed prior to any merger/acquisition.