Optimize DC Plans for Mergers & Acquisitions Success

Mergers and Acquisitions: Defined Contribution Plan Management

Mergers and acquisitions take many forms, and each has significant implications regarding retirement benefits and how they may (or may not) change. To illustrate, let’s compare two types of corporate transactions — the asset purchase versus the stock purchase. In an asset purchase, whether the acquiring company becomes the sponsor of the seller’s retirement plan is subject to negotiation. In contrast, with a stock purchase, the buyer automatically becomes the sponsor of the acquired company’s retirement plan, unless the plan is terminated prior to the closing of the transaction. Additional considerations include whether employees of the company being acquired have “protected benefits” under the seller’s plan — including vesting schedule, early versus normal retirement age and conditions for withdrawals.

How any protected benefits stack up in both plans can be a determining factor in whether it makes more sense to merge the plans or run them separately. There are a host of other retirement plan factors — including employer matching contribution formulas, testing methods, highly compensated employee determinations and Roth contributions — that should be reviewed before determining how to handle the retirement plan aspect of a merger or acquisition. Hence, it’s crucial to conduct a side-by-side comparison of the features of both organizations’ plans. A compliance review of the two existing plans also should be conducted to see whether there are any issues that may affect the plans’ qualified status. This can help prevent any unwelcome surprises down the road.

Determine the Best Approach

During a merger or acquisition, there are three approaches to consider, with different considerations pertinent to each.

 


Asset Purchase


Stock Purchase


Merge seller’s plan into the buyer’s plan


In many cases, if a buyer already has a retirement plan the seller’s plan will be excluded from the transaction in the purchase agreement. However, a buyer could agree to merge the plans or accept a transfer of a portion of the plan’s assets and liabilities. Before agreeing to merge the plans, the buyer should conduct the same due diligence as they would in a stock purchase.


In a stock purchase, the buyer will acquire the seller’s plan unless it is terminated prior to closing. A careful side-by-side comparison of the plans and a compliance review of the seller’s plan should be conducted to determine crucial facts regarding the plans’ features and benefits, operational compliance with plan documents, tax-qualified status, and ERISA compliance (if applicable) before deciding whether to merge the plans.


Continue two separate retirement plans


If a large number of employees transfer with the asset purchase, the buyer could take action to become the sponsor of the seller’s plan. If the buyer already has an existing plan, in most cases, the plans will have to be aggregated for non-discrimination testing and coverage purposes. Conversely, if the buyer does not become the sponsor of the seller’s plan, the seller would need to determine if the number of employees going with the asset sale triggers a partial termination, which has its own implications around vesting, among other concerns.


Retirement plans maintained by the same employer generally must be tested together under applicable nondiscrimination rules. However, a special transition rule for mergers and acquisitions often will enable the plans to be tested separately for a limited time following a corporate transaction, allowing the plan sponsor to avoid an immediate conversion process. In addition, if one or more plans covers union employees, continuing separate plans indefinitely may be desirable or even required under applicable collective bargaining agreement(s). Before deciding to continue separate plans, the plan sponsor should carefully consider the benefits and feasibility of an immediate plan merger.


Terminate sellers’ plan and distribute


Assuming the seller’s plan remains with the seller after the asset sale, this decision is at the discretion of the seller (and subject to the provisions of the plan).


In the case of a stock purchase, if the seller’s plan is terminated prior to the closing of the transaction, employees generally will become fully vested and receive distributions of their benefits, which can then be rolled over into the buyer’s plan. With this option, considerations include understanding the plan distribution rules, managing the rollover process, treatment of outstanding participant loans, and whether to grant the seller’s employees prior service credit under the buyer’s plan for eligibility and vesting purposes.

 

Key Considerations Prior to a Plan Merger or Acquisition

A thorough due-diligence process and pre-closing plan assessment has the potential to enhance the existing plan design and make the retirement plan a more robust tool for attracting and retaining high-quality employees and helping them invest for a more secure future.

We recommend involving your advisor, recordkeeper, and/or legal counsel as early as possible to help work through the retirement plan due diligence component. You should consult your legal counsel for a complete list of considerations specific to your plan merger or acquisition. Below are a few key areas to review.

Examine Employee Demographics

Examine employee census information for accuracy and to get a better understanding of the total counts of:

  • Eligible employees
  • Ineligible employees
  • Active participants
  • Inactive participants
  • Orphaned accounts

Consider Fee Benchmarking

  • How much do the plans currently pay in recordkeeper, third party administrator, and advisor fees?
  • How are the fees structured: asset-based fee, flat fee, or per capita?
  • Are the fees appropriate for the services provided?

Compare Plan Design Provisions

  • Eligibility
  • Compensation
  • Contributions
  •  Vesting
  • Forfeiture
  • Retirement
  • Distributions
  • Testing

Review Investment Menus

  • Evaluate the investment menu from a fiduciary perspective. Examine each plan’s investment menu to determine whether current investment options can or should be maintained going forward and how investments will be mapped to new funds, if applicable.
  • Confirm if any of the funds in the existing and acquired plans have restrictions that would prevent them from being included in the revised lineup.

Assess Plan Documents

Gather and review plan documents and determine whether they are current and compliant.

  • Basic plan document and adoption agreement or individually designed plan document
  • Summary plan description
  • Current IRS determination letter
  •  Form 5500
  • Service, trust and recordkeeping agreements
  • Investment documents, including:
    • Investment policy statement
    • Investment provider agreements, if applicable
    • Insurance agreements, if applicable
    • List of investment options currently offered by the plan, including share classes and/or ticker symbols of mutual funds
  • Recent plan level statements showing sources of contributions (salary deferrals, match, profit-sharing, etc.)
  • Participant loan policy
  • Termination provisions including discontinuation periods
  • Written notifications and deadlines
  • Copies of prior years’ discrimination testing results
  • Copies of prior years’ audited financial reports
  • Collective bargaining agreements, if applicable

Conduct a Compliance Review

As plan fiduciaries, plan sponsors are responsible for confirming that their plans comply with ever-changing and complex federal laws. During a plan review due to a merger or acquisition, plan sponsors should consider:

  • What are the similarities and differences between the existing and acquired plan(s)? How will any differences be reconciled?
  • Have all required plan amendments been adopted? If necessary, prepare plan amendments.
  • Have both plans conducted discrimination testing in recent years?
  • How will merging, or not merging, the plans impact compliance testing? Determine the availability of transition period for discrimination testing.
  • Review recent Forms 5500. What impact will a merger have on Form 5500 preparation?
  • Review previous plan audits to identify problems.
  •  Have required notices been provided to plan participants? What notices may be required because of a plan merger?

For more information on merger and acquisition considerations, please contact your PNC representative.