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Page 1: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

Page 2: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 3: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Objectives

◼ Methods of handling retirement plans in mergers and

acquisitions

◼ Importance of the corporate transaction structure

◼ Issues with plan termination

◼ Other considerations

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Page 4: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

◼ 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

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Page 5: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

◼ 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

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Page 6: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

◼ 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

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Page 7: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

◼ 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

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Page 8: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

◼ 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

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Page 9: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 10: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 11: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Issues with Plan Termination

◼ Alternative defined contribution plan rule

◼ Missing participants

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Page 12: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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)

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Page 13: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 14: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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)

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Page 15: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 16: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 17: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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)

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Page 18: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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.

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Page 19: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Best Practices

◼ “Scrubbing” of data” – at least annually

◼ Maintain multiple points of contact

◼ Regularly update contact information

◼ Consolidation of Multiple Account Balances

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Page 20: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 21: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 22: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 23: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 24: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

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

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Page 25: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Other Considerations

◼ Transfer of assets considerations

◼ Credit for prior service

◼ Vesting

◼ Plan loans

◼ Others

◼ Plan Investments

◼ Nondiscrimination requirements

◼ Beneficiary Designations

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Page 26: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Transfer of Assets Considerations

◼ Tax qualification status and plan defects

◼ Asset transfer rule

◼ Anti-cutback rule

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Page 27: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Credit for Prior Service

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

employer) credit must be granted for both eligibility and vesting

for future and pre-acquisition contributions.

◼ If the buyer maintains a plan that was not the plan maintained by

the seller (predecessor employer) it is required to provide service

crediting to the extent provided in regulations. Since the IRS has

not issued regulations the buyer presumes that it does not need

to credit service with the seller if it does not maintain the sellers

plan. Sometimes the buyer chooses to credit prior service with

the seller.

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Page 28: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Vesting

◼ Full vesting is required under the US Code when there is a plan

termination, complete discontinuance of contributions (i.e., plan

freeze), or a partial termination

◼ Partial termination:

◼ The employer terminates a large group of employees covered under

the plan. (Example: seller sells a division and spins off a portion of

the sellers plan or transfer the assets of those employees to the

buyer’s plan)

◼ Rule of thumb: 20% turnover rate

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Page 29: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Plan Loans

◼ Transfer of loans in connection with plan merger

◼ Rollover of loan

◼ Bridge loan

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Page 30: Qualified Retirement Plans in Merger and Acquisitions ......2019 Retirement Plans Conference. Disclaimer These slides have been prepared for educational purposes only and are not intended,

Others

◼ Plan Investments

◼ Nondiscrimination requirements

◼ Beneficiary designations

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