Retirement plans play a critical role in M&A and should not be overlooked during planning or integration.
Every year, thousands of business mergers and acquisitions occur, but only a few transactions reach headlines. Several steps go into executing a successful merger or acquisition, but one of the very last or overlooked aspects of M&A are the retirement plans of the two parties.
Having a structurally sound and well-performing retirement plan, such as a 401(k), cash balance plan, non-qualified plan, or ESOP is valuable for your company and its employees, but it also plays a critical role when looking to merge with or acquire another company. A well-qualified advisor can assist you in building a solid retirement plan to attract and retain talent, create successful retirement illustrations for business owners and their employees, and provide knowledgeable assistance throughout the M&A process.
Outside of the M&A process, attracting and retaining top talent continues to be a hard-fought battle. Offering a competitive retirement plan with great employer contributions, vesting schedules, sound investment options, etc. all work together to attain and retain talent. Attracting key executives and keeping them with your company is an even harder battle. This is where offering a non-qualified plan comes into play. Non-qualified plans are innovative tools to help your company stand out, but also recruit, retain, reward, and retire your key employees. Now, what happens if you are going through the M&A process? An advisor who specializes in retirement plans can aid you in choosing the best option for your company during the M&A process. Pre- and post-deal, non-qualified plans require special due-diligence to ensure compliance with IRC Section 409A. To focus on 401(k) plans, there are two main options in the M&A process, merge or terminate.
When two retirement plans merge, there are several items that need to be taken into consideration. First, is the transaction a stock or asset purchase? More commonly, we will see a stock purchase where the post-merger company is assuming all assets, liabilities, and equity. In this scenario, the acquired company will usually merge their plan into the post-merger company’s plan, but the post-merger company will go through a thorough benefit analysis to ensure they offer equal or better benefit options. Part of the benefit analysis is collecting plan documents from the acquired company’s plan, to ensure the plan mergers are compliant with the anti-cutback rule. The anti-cutback rule helps ensure that the employees from the acquired firm do not lose any of their protected benefits from their prior company’s plan.
So why would an advisor recommend that the post-merger company should merge the two plans together? Simplicity for the business owner of the post-merger company and less stress for the employees of the acquired company. A plan merger is a less drawn-out process compared to a plan termination. In addition, the employees from the acquired company will be subject to some additional stressors from learning about a new company and its operations, so why not make the transfer of their retirement assets easier with a plan merger through a simple blackout period? A proactive advisor will assist the business owners and employees throughout this process for an efficient and effective outcome.
The second option we look at for retirement plans going through M&A is plan termination. There are a couple of ways a plan termination can look. The first way is quite uncommon, but this is where both the acquired company and the post-merger company terminate their current retirement plans and create an entirely new retirement plan. As you can probably imagine, there is a lot of work involved with this option, which is why it is uncommon. The second way is for the acquired company to terminate their retirement plan and join the post-merger company’s retirement plan. This is a far more common approach to plan terminations, and assistance from an advisor is highly recommended.
So, what does this process look like? The acquired company needs to file a plan amendment for termination of their current retirement plan. Participants in this plan will be notified of the plan termination and the intention to join the post-merger company’s retirement plan. In addition to the notices being sent out, final employee and employer contributions need to be deposited into the terminating plan. Upon plan termination, participants must be 100 percent vested in all accrued benefits. These steps do not make the plan termination final, as this process can take several months up to a year to complete. A plan termination is not official until all plan assets are paid out to participants and beneficiaries.
What does this mean for the business owner of the acquired company? Until the plan is officially terminated, the plan will be subject to annual testing, 5500 filing, and costly annual plan audits if the plan has more than 100 eligible participants. This is where an advisor can help streamline the termination process, save time, and save money. An advisor will reach out to the participants to review their options with their retirement plan funds, which include rolling over to a current employer’s retirement plan, rolling over to an IRA or Roth IRA, or taking a withdrawal of their retirement funds. An advisor acting as a fiduciary will help participants make the most well-informed decision on what to do with their funds. Plan terminations are very common, but having the correct guidance and assistance is crucial during this process.
The M&A process has many moving parts and can become hectic. Retirement plans are likely an afterthought, but overlooking the effects of M&A on your company’s retirement plan is not something to take lightly. Working with an experienced advisor, pre- and post-merger, is highly recommended so business owners can focus on what matters most: the merger. In addition, advisors provide your employees with a less stressful, informative, and beneficial process.
CJ LaPorta, CFP, CRPS, AIF is a senior corporate retirement plan advisor at Stonebridge Financial Group, LLC. Connect with him on LinkedIn.