Qualified Retirement Plans in Merger and Acquisitions ... ... 2019 Retirement Plans Conference....

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Transcript of Qualified Retirement Plans in Merger and Acquisitions ... ... 2019 Retirement Plans Conference....

  • Qualified Retirement Plans in

    Merger and Acquisitions

    Transactions

    Mayleen Santiago Garcés, Esq.

    Carlos J. Villafañe-Real, Esq.

    October 24, 2019

    Popular Fiduciary Services

    2019 Retirement Plans Conference

  • Disclaimer

    ◼ These slides have been prepared for educational purposes only

    and are not intended, and should not be relied upon, as

    accounting, tax or legal advice

    ◼ Any tax advice contained in this communication is not intended

    to be used, and cannot be used, for purposes of (i) avoiding

    penalties imposed under the United States Internal Revenue

    Code of 1986, as amended or (ii) promoting, marketing or

    recommending to another person any transaction or matter

    addressed herein

    2

  • Objectives

    ◼ Methods of handling retirement plans in mergers and

    acquisitions

    ◼ Importance of the corporate transaction structure

    ◼ Issues with plan termination

    ◼ Other considerations

    3

  • ◼ Generally, influences how to handle the 401(k) plan of the seller

    ◼ It determines as a legal matter how liabilities of the seller are

    affected

    ◼ It also affects the employment status of affected employees

    differently

    Importance of Corporate Transaction’s Structure

    4

  • ◼ Common transaction structures:

    ◼ Asset purchase – purchase all or specified assets and agreed upon

    liabilities.

    ◼ Stock purchase – purchases some or all of the stock or other

    ownership interest

    ◼ Merger – two businesses unite into a single business

    Importance of Corporate Transaction’s Structure

    5

  • ◼ Asset purchase:

    ◼ Purchase all or specified assets and agreed upon liabilities

    ◼ The seller remains the Plan sponsor

    ◼ Employment termination

    Importance of Corporate Transaction’s Structure

    6

  • ◼ Stock purchase:

    ◼ Purchases some or all of the stock or other ownership interest

    ◼ Acquires rights, responsibilities and liabilities of the business

    ◼ Buyer becomes plan sponsor

    ◼ No termination of employment

    Importance of Corporate Transaction’s Structure

    7

  • ◼ Merger:

    ◼ Two businesses unite into a single business

    ◼ Equivalent to stock purchase

    ◼ Acquires rights, responsibilities and liabilities of the business

    Importance of Corporate Transaction’s Structure

    8

  • Methods of Handling Retirement Plans in Mergers

    and Acquisitions

    ◼ Plan termination

    ◼ Plan freeze

    ◼ Continue plan

    ◼ Merge plan

    ◼ Trust to trust transfer

    ◼ Participant’s elective transfers

    9

  • Plan Termination

    ◼ Pre closing:

    ◼ Distributions can be made to plan participants if the employer

    maintaining the plan does not maintain an alternative defined

    contribution plan

    ◼ Post closing:

    ◼ Continue Plan

    ◼ Freeze Plan

    ◼ Merge Plan

    10

  • Issues with Plan Termination

    ◼ Alternative defined contribution plan rule

    ◼ Missing participants

    11

  • Issues with Plan Termination

    ◼ Alternative defined contribution plan rule:

    ◼ Other defined contribution plan maintained by the same employer

    ◼ If it exists at any time within the period beginning on the date of the

    termination and ending 12 months after the plan distributed all of its

    assets

    ◼ Fewer that 2% exception (24 month period)

    12

  • Missing Participants

    ◼ Participants and beneficiaries that cannot be located or fail to

    respond distribution notices

    ◼ Fiduciary must make reasonable efforts to locate

    ◼ When those efforts fail, select appropriate distribution options to

    complete the plan’s termination

    13

  • Missing Participants

    (U.S. Department of Labor Guidance)

    ◼ Initial Search Methods:

    ◼ Certified mail

    ◼ Attempt to identify and contact the beneficiaries designated

    ◼ Check the records of the employer and related plans for up to date

    information

    ◼ Privacy concerns considerations

    ◼ Use free electronic search tools (i.e., internet search, public record

    databases and social media)

    14

  • Missing Participants

    (U.S. Department of Labor Guidance)

    ◼ Additional Search Methods:

    ◼ If participant or beneficiary cannot be found using initial search

    ◼ Searches that charge a fee may be required when the account

    balance is large enough to justify the expense

    ◼ Fee must be reasonable and consistent with the plan terms and

    ERISA

    ◼ Additional steps include

    ◼ Internet search tools that charge a fee

    ◼ Commercial locator services

    ◼ Credit-reporting agencies

    ◼ Information brokers

    ◼ Investigation databases, and similar services charging a fee

    15

  • Missing Participants

    (U.S. Department of Labor Guidance)

    ◼ Distribution options

    ◼ Rollover to an IRA established for the missing participant (Preferred

    Distribution Option). There is fiduciary protection for this option

    ◼ Deposit the account balance in a separate interest-bearing

    ◼ Federally insured bank account in the missing participant’s name

    ◼ Distribute the account balance to a state unclaimed property fund

    ◼ Uncashed/outstanding checks – no fiduciary protection and/or

    guidance

    ◼ PBGC missing participants program for terminating plans

    16

  • Missing Participants

    (IRS Guidance on Search Methods)

    ◼ IRS Guidance on search methods in case of required minimum

    distributions

    ◼ Alternative contact information in the records of the plan, related

    plans, and plan sponsor, as well as publicly available records

    ◼ Commercial locator service, credit reporting agency or proprietary

    internet search tool

    ◼ Certified mail to individual’s last known mailing address and used

    other appropriate contact information (i.e., email addresses and

    telephone numbers)

    17

  • Missing Participants

    (IRS Correction Principles)

    ◼ A Plan sponsor will not be considered to have failed to correct a

    failure due to the inability to locate an individual if reasonable

    actions to locate the individual have been undertaken; provided

    that, if the individual is later located, the additional benefits are

    provided to the individual at that time.

    18

  • Best Practices

    ◼ “Scrubbing” of data” – at least annually

    ◼ Maintain multiple points of contact

    ◼ Regularly update contact information

    ◼ Consolidation of Multiple Account Balances

    19

  • Continue Plan

    ◼ Maintain the plan as an active plan

    ◼ May have to be amended to update the plan’s governance

    provisions except if the plan contains successor plan sponsor

    provisions

    ◼ No full vesting required as long as contributions do not cease

    20

  • Plan Freeze

    ◼ No new employees join the plan as participants and no new

    contributions flow into the plan

    ◼ No distributions until separation from service

    ◼ Complete discontinuance of contributions (100% vesting)

    ◼ Plan treated as an ongoing plan

    21

  • Merger

    ◼ Merging two plans into a single plan. Generally, the seller’s plan

    into the buyers plan

    ◼ Anti-cut back rule considerations

    ◼ May import operational error or plan defects from the plan

    ◼ Reduces number of plans and administrative costs

    ◼ No distributions nor full vesting required

    22

  • Trust to Trust Transfer Assets

    ◼ Generally post closing

    ◼ Transfer from seller to buyer’s plan in a trust to trust transfer

    directly between plans

    ◼ No distributions to participants

    ◼ Transferred of assets carry the same liabilities of prior plan

    ◼ Avoids the administrative burden of coordinating multiple rollover

    request

    23

  • Participant’s Elective transfers

    ◼ Plan to plan transfer

    ◼ Participant voluntarily elects to have the account balance

    transferred to another plan without carrying over protected rights

    24

  • Other Considerations

    ◼ Transfer of assets considerations

    ◼ Credit for prior service

    ◼ Vesting

    ◼ Plan loans

    ◼ Others

    ◼ Plan Investments

    ◼ Nondiscrimination requirements

    ◼ Beneficiary Designations

    25

  • Transfer of Assets Considerations

    ◼ Tax qualification status and plan defects

    ◼ Asset transfer rule

    ◼ Anti-cutback rule

    26

  • Credit for Prior Service

    ◼ If the buyer maintains the plan of the seller (pred