Three Things You Should Know About Your 401(k) Plan if You Are Selling or Buying a Company
Buying or selling a company is an expensive and confusing process, often charged with a lot of emotion. The buyer is starting on a new business excursion, while the seller is often moving on from a lifetime effort, which commonly makes the transaction exciting and scary on both sides. Also, the selling company’s employees usually are scared, and maybe enthusiastic, about the unknown future. When the companies involved have 401(k) plans, however, the process is even more complex, and failure to properly deal with plan issues can create disastrous results.
All of the issues involved in M&A with regard to plans are the subject of more than one book. However, here are a few suggestions to help you get through the process safely:
Get advice from retirement plan professionals before the transaction takes place, and listen to what they say.
People generally don’t think about the plan in the middle of a transaction, but there are many issues that can be addressed only before the transaction happens. Once the sale is over, the dice have been rolled and everyone must be satisfied with the result – even if it is not desirable. The solution is to get advice early and take the needed actions before the transaction takes place. This advice is for both the buyer and the seller. If you want a certain result in your plan, you need to make sure the plan language is set up that way and adopt any amendments needed to make it so before the transaction takes place.
The law gives you a transition period; take advantage of it and don’t squander it.
You have some time to make decisions with regard to the plan (if you have set things up properly before the transaction). The law provides a transition period that runs from the date of the transaction to the last day of the plan year following the year in which the transaction occurs. So, if a sponsor with a calendar year plan sells the company on 12/10/18, the transition period runs through 12/31/19 – a little more than a year. On the other hand, if the transaction was delayed about 3 weeks until 1/3/19, the transition period runs through 12/31/20 – nearly two years. Either way, you can lose the transition period by amending the plan in the interim, so you need to plan ahead and make sure that any amendments are done before the transaction happens.
Know what kind of transaction you are entering into and what are the plan ramifications.
There are three types of transactions to a business sale or purchase: stock sales, asset sales, and mergers. In a stock sale or merger, the buyer ends up keeping the plan (unless it’s terminated); in an asset sale, the buyer is purchasing the stuff the company owns, and the seller controls the plan (and his or her company) after the transaction. If there’s a stock purchase and the buyer intends to terminate the 401(k) plan of the company it is buying, that may need to happen before the transaction. If it’s an asset purchase, it is likely that all participants will be fully vested when the transaction takes place. The type of transaction controls the results, and often dictates steps that should be taken.
Conclusion
If you take away only one thing from this article, it’s the first point. If you are buying or selling a company, regardless of what your company or M&A lawyer says, get a knowledgeable pension professional involved. You will be well served and will experience fewer surprises taking such a precaution.
Ilene H. Ferenczy, J.D., CPC, APA, is the Managing Partner of Ferenczy Benefits Law Center, an employee benefits law firm in Atlanta, Georgia. She advises clients on all types of employee benefit plans, particularly focusing her practice on qualified retirement plans, benefits issues in mergers and acquisitions, and advising third-party administrators of employee benefit programs on technical and practice issues.
ARTICLE 1 PRIMARY KEY PHRASE
“401k Plan merger acquisition”
