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Handling Qualified Retirement Plans in Mergers and Acquisitions
Practical Law Legal Update 3-523-1621 (Approx. 6 pages)
Handling Qualified Retirement Plans in Mergers and Acquisitions
by PLC Employee Benefits & Executive Compensation
| Published on 18 Dec 2012 • USA (National/Federal) |
A discussion of the legal and practical issues raised by qualified retirement plans encountered in corporate mergers and acquisitions under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.
Companies that are parties to a corporate merger or acquisition must consider legal and practical issues under ERISA and the Internal Revenue Code (IRC) that are raised by the qualified retirement plans involved in the transaction. Practical Law Company's Practice Note, Qualified Retirement Plans in Mergers and Acquisitions provides a comprehensive guide regarding the treatment of qualified retirement plans in corporate mergers and acquisitions, from both a buyer and seller perspective, and identifies:
- Issues to be considered before the transaction, including the impact of the type of transaction and at what level the plans are sponsored and maintained.
- The most common types of qualified retirement plans encountered in mergers and acquisitions.
- An employee benefits attorney's role in the acquisition process.
- The significant retirement plan issues arising in transactions and best practice tips.
- The legal options available to the parties, including:
- plan assumptions;
- mergers;
- trust-to-trust transfers;
- spinoffs;
- terminations; and
- freezes.
Select portions of the Practice Note follow. See the full Practice Note for a thorough analysis of this topic.
Impact of the Type of Transaction
Typically the structure of the transaction will determine what approach the parties take regarding their qualified retirement plans and associated liabilities. However, there are certain circumstances where the liabilities or obligations associated with these plans are so great that their existence determines the structure of the deal. For example:
- A buyer that is acquiring a company that sponsors a complex, underfunded single-employer defined benefit plan may require an asset sale (rather than a stock sale) to avoid automatically inheriting significant liability under the plan.
- A seller that is a contributing employer to a multiemployer plan and is potentially subject to significant (or difficult to determine) withdrawal liability as a result of the transaction may require a stock deal.
- A buyer that cannot gauge the extent of the liabilities associated with the seller's plans during the due diligence process may require an asset sale so that it can negotiate responsibilities for the liabilities and protect itself against unknown future liabilities.
Generally speaking, however, the structure of the transaction is based on factors other than qualified retirement plan considerations and will largely determine the parties' legal options for the plans in existence at the time of the transaction.
For specific tips on how to handle qualified retirement plans in stock sales, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Stock Sale. For specific tips on how to handle these plans in asset sales, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Asset Sale.
Identifying Where Plans Are Sponsored and Maintained
Before analyzing the legal effects of the transaction on the qualified retirement plans offered by the parties, buyer's counsel must determine whether the buyer is acquiring:
- A business entity that sponsors and maintains the plans.
- An entity or entities whose employees are participating in plans sponsored or maintained by a parent or other entity.
If the buyer is acquiring 100% of the stock of the seller, this becomes less of an issue because the buyer automatically assumes these plans by law (unless the parties negotiate and agree otherwise through the purchase agreement). However, in all other cases, identifying the level at which the plans are sponsored is the first step in determining how the parties ultimately handle the fate of the retirement plans involved.
Seller's Plans
In a stock deal, if the entity being sold maintains its own qualified retirement plans, it may be preferable for the buyer to assume those plans, as would be the case absent negotiation. However, if the employees of the entity being purchased participate in a plan maintained by a member of its controlled group, the buyer may not have the ability to assume the plans and must determine its legal options, including the legal status and liabilities associated with the seller's plans after closing.
In an asset deal where the buyer is acquiring a business entity that sponsors and maintains its own qualified retirement plan for the benefit of the employees of that entity, the buyer may either:
- Negotiate with the seller to assume the plan (though not required by law) (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Assuming Plan).
- Merge the plan into its own plan (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Plan Mergers, Trust-to-Trust Transfers and Spinoffs).
- For certain defined contribution plans, require the seller to distribute plan assets under IRC Section 401(k)(10) (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Distribution of IRC Section 401(k) Plan Benefits).
However, in an asset deal where the seller sponsors and maintains its qualified retirement plans at the parent level for the benefit of all of its employees but is only selling a portion of its business, the buyer's options are more limited. The buyer cannot negotiate to assume the plan because the seller must continue to sponsor and maintain the plan for the benefit of the employees that are not being acquired in the transaction. The buyer's options are limited to merging the relevant portion of the plan into its own plan or requiring the seller to distribute plan assets under IRC Section 401(k)(10).
In this circumstance the buyer is less concerned with the legal status and liabilities associated with the seller's plans after closing because it is not assuming the seller's entire plans. Rather, the buyer is more concerned with the seller's representations and warranties regarding the plan assets and liabilities that it is acquiring (if any).
Buyer's Plans
It is also essential for the parties to identify the level at which the buyer's qualified retirement plans are sponsored and maintained before the transaction occurs. If the buyer maintains its qualified retirement plans at the parent level for the benefit of all of its employees, it may have more of an incentive to try to merge (or transfer) the relevant assets of the seller's plans into its own plans to maintain a similar benefit structure for all employees after closing.
If, however, the buyer's subsidiaries sponsor their own qualified retirement plans and the entity being purchased does so as well, it may not be troubling for the buyer to either:
- Negotiate to assume the plans post-closing (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Assuming Plan).
- Create a "cloned" plan for the employees of the acquired entity after closing.
If a buyer sponsors several qualified retirement plans at the subsidiary level and it is acquiring all or a portion of the seller's business that is similar to a portion of its own business, it may wish to integrate the benefits provided within the seller's plan with the benefits provided to its own employees with similar job functions.
Significant Retirement Plan Issues
Attorneys handling qualified retirement plans in the context of mergers and acquisitions may encounter significant issues that must be factored into the cost of the transaction when negotiating indemnifications and purchase price set-offs in the agreement. Some of the most significant issues involving qualified retirement plans include:
- Liabilities of the controlled group (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Controlled Group Liability).
- Liabilities of single-employer defined benefit plans (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Single-employer Defined Benefit Plan Liabilities).
- Restrictions on benefits under the Pension Protection Act (PPA) (see Practice Note, Qualified Retirement Plan in Mergers and Acquisitions: PPA Benefit Restrictions).
- Liabilities involving multiemployer plan withdrawal (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Multiemployer Plan Withdrawal Liability).
- Partial terminations (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Partial Termination).
- ERISA reportable events (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Reportable Events).
- Plan qualification defects (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Plan Qualification Defects).
- Breaches of fiduciary duty under ERISA (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: ERISA Fiduciary Duty Issues).
- Loans under defined contribution plans (see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Defined Contribution Plan Loans).