This blog post is the second in a series of six that will highlight considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.
Buyers and sellers alike face a number of issues, oftentimes complex, leading up to and following a corporate merger or acquisition. If both entities are sponsors of a defined contribution (DC) plan, many decisions have to be taken into account and given adequate consideration. When possible, the future of the plans involved should be decided before the transaction because options are limited afterward. Be sure to have a game plan in place to complete DC plan due diligence before closing.
There are generally two types of acquisitions—an asset purchase or a stock purchase. The choices associated with them have significantly different impacts to plan participants. Here’s a look at each.
ASSET PURCHASE CONSIDERATIONS
With an asset purchase, a buyer is only “buying” the assets or a portion of the assets of the seller. The buyer will generally not have the responsibility for the seller’s DC plan. That means any employee who is hired by the buyer would simply be terminated by the seller and receive any distribution option available under the seller’s plan. The seller, and for that matter the DC plan, would continue to remain in existence. (Note: This often results in a partial plan termination in which all affected participants must be given 100% vesting.)
STOCK PURCHASE OPTIONS
If the transaction is a stock purchase, the buyer can choose several options: maintain the seller’s plan, terminate the seller’s plan, or merge the two plans. Here’s a look at the implications of each.
1. Seller’s plan is maintained
If the decision is to maintain the seller’s DC plan, several issues need to be considered:
- What is the additional cost for the maintenance of and reporting on two separate plans?
- Will there be participants in each plan or will one plan be “frozen” and one plan “active”?
- If both plans are active, how will transfers between the two groups be handled?
- Will the benefits offered between the two plans be the same or different? If different, how will the differences be communicated?
- What are the nondiscrimination testing implications?
2. Seller’s plan is terminated
The decision to terminate the seller’s plan must take place before the closing of the transaction—otherwise, the buyer assumes responsibility for the seller’s DC plan. Before terminating the plan, consider:
- Are there outstanding participant loan balances that could default?
- Who will be responsible for the final audit and 5500 reporting?
- Will there be a need to identify and locate “lost” participants?
- Will rollovers into the buyer’s plan be allowed?
- Will loan rollovers into the buyer’s plan be permitted?
3. Seller’s plan is merged into buyer’s plan
When considering whether to merge the two DC plans, it’s important to complete due diligence before the transaction to prevent issues after the transaction. Review operational issues and address them up-front. If compliance issues are uncovered, review options to determine if remedies exist under the Employee Plans Compliance Resolution System (EPCRS). Then complete a side-by-side review of the design of each plan to compare plan designs. A final plan design incorporates the best of both plans and is a win-win for all participants. Be sure to:
- Analyze participation levels of the new, larger group and determine whether the merged plan will pass or fail nondiscrimination testing
- Consider the effective date of the “merged” plan—take into account January 1 dates if safe harbor plan status is needed
- Determine if participants should be automatically enrolled, if deferral rates should be mapped over, or if reenrollment should be offered
- Review investment options to determine any fund additions or replacements, finalize the asset mapping strategy, and decide if the merged participants will be defaulted
- Identify any protected benefits
- Create comprehensive participant communication
- Determine how to handle Roth assets of the seller’s plan if the buyer’s plan does not have a Roth provision
BEFORE, DURING, AND AFTER THE TRANSACTION
An abundance of due diligence, careful analysis, and a detailed project plan is paramount. The impact, both to the corporation and the employees, is considerable. Well-informed choices and decisions can go a long way in making the transition a smooth one for all involved.