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
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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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◼ 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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◼ 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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◼ 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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◼ 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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◼ 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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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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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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Issues with Plan Termination
◼ Alternative defined contribution plan rule
◼ Missing participants
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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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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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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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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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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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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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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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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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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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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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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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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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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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Other Considerations
◼ Transfer of assets considerations
◼ Credit for prior service
◼ Vesting
◼ Plan loans
◼ Others
◼ Plan Investments
◼ Nondiscrimination requirements
◼ Beneficiary Designations
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Transfer of Assets Considerations
◼ Tax qualification status and plan defects
◼ Asset transfer rule
◼ Anti-cutback rule
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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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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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Plan Loans
◼ Transfer of loans in connection with plan merger
◼ Rollover of loan
◼ Bridge loan
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Others
◼ Plan Investments
◼ Nondiscrimination requirements
◼ Beneficiary designations
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