If your company is involved in a merger or spinoff, you’ll need to plan carefully for how your qualified retirement plan will be affected. Failure to plan ahead for the impact of a merger or spinoff on your plan could lead to unintended consequences.Impact of a Merger on Plans
In a merger, the retirement plans maintained by the acquired and acquiring companies will be impacted in one of three ways:
1. The new post-merger company will become the new plan sponsor. This will happen if just one of the merged companies has a retirement plan. The new sponsor must notify all plan participants of its name and address.
In this scenario, the terms of the retirement plan aren’t significantly changed, so there’s usually little impact on existing plan participants. Employees of the company that did not previously have a plan will now have an opportunity to join the plan, assuming they meet all eligibility requirements.
2. The retirement plans of the merging companies are merged together. The result will be that the new post-merger company offers just one retirement plan to all employees. While some administrative terms in the plan may be changed, there usually isn’t much impact on participants or their benefits.
Here, you must be careful not to violate what’s referred to as the anti-cutback rule. In other words, employees cannot receive reduced benefits and protected benefits cannot be eliminated. These include accrued and early retirement benefits, retirement-type subsidies, and optional forms of benefits.
3. Either one or both of the merging companies will terminate its plan. This will result in one of these potential scenarios:
- The new post-merger company does not offer a retirement plan;
- The participants in the terminated plan are given the opportunity to join the other company’s plan, which effectively becomes the post-merger company’s plan; or
- A new plan is created by the post-merger company after both companies terminate their plans.
If either or both plans is terminated, you must notify all participants and distribute plan assets to participants (if this is allowed) as soon as it’s administratively feasible. Each employee will be 100 percent vested in his or her accrued benefits or account balance upon plan termination, regardless of the plan’s vesting schedule.
Best Practices to Consider
Here are a few best practices to consider for your retirement plan in the event of a corporate merger or spinoff:
Define the effective date of the transaction. This will determine when the new plan takes ownership of the plan assets, regardless of whether or not assets have been physically transferred. For a spinoff, the effective date is the inception date of the newly formed plan. If a new plan is formed, you may be able to defer the plan audit if the effective date results in a plan year of less than seven months.
If a plan is being terminated, the year-end for that final plan year is determined by the date in which all plan assets have been distributed. Keep in mind that the final Form 5500 and any related audited financial statements required may be due prior to the plan’s normal due date.
Watch out for a partial plan termination. If the number of plan participants is reduced by more than 20 percent, this could result in what’s referred to as a partial plan termination. If this occurs, all affected participants become 100 percent vested upon the effective date of the merger or spinoff. Depending on the circumstances and timing of involuntary terminations, a partial plan termination can be deemed by the IRS to have occurred over a number of months or even years.
Map participant accounts to investment options. You must follow the rules for disclosures and blackout periods when transferring plan assets. Make sure that adequate documentation is maintained to allow auditors to test asset transfers, including account mapping at the participant level to avoid audit scope limitations or reportable transactions.
If accounts are participant-directed, the mapping should be consistent with what participants elected in their old retirement plan. Participants should have an opportunity to re-balance their accounts and make elections for allocations in accordance with ERISA rules.
Complex Details
The retirement plan details involved in mergers and spinoffs can get quite complex. Therefore, you should consult with a benefit plan specialist and ERISA attorney for guidance in your specific situation.
Please contact us if you would like to discuss the specific implications of a merger or spinoff on your company’s retirement plan.