This is the third in a series of blog posts aimed at getting the human resources, benefits, and executive compensation functions of your organization ready for a potential sale or similar corporate transaction. Part I provided general guidelines and suggestions on how to get organized. Part II addressed change of control documents that may be affected by a potential sale, as well as the treatment of outstanding equity compensation. This post addresses the impact of a sale on your organization’s retirement plans.

In our earlier posts, we recommended that you begin to compile the definitive copies of executive compensation and employee benefit plan materials. For every retirement plan that your organization sponsors, whether an IRA-based plan (payroll deduction IRA, SEP, or SIMPLE IRA Plan), a defined contribution plan (profit sharing plan or 401(k)), or a defined benefit plan (single employer plan or multiemployer plan), to the extent applicable, be sure to have on hand all of the following:

  • Board resolutions or other corporate action approving the establishment or adoption of your retirement plan
  • Plan document—if the plan is a preapproved plan, this would be the adoption agreement and master plan document
  • If there are other related entities or affiliates that participate in the retirement plan, executed participation or adoption agreements from these entities
  • Plan amendments adopted since the adoption or last amendment and restatement of the plan document
  • Most recent summary plan description
  • Summaries of material modifications since the last SPD update
  • Favorable determination or opinion letters from the IRS
  • Annual testing reports from the last three years and evidence of corrections if any issues were identified
  • Forms 5500 and evidence of timely filing

Once you have gathered these documents, we suggest working with your counsel or advisors to ensure the documents are up to date and compliant with applicable laws and regulations.

Practical Tips:

  • Companies adopt amended and restated plans periodically. Upon each amendment and restatement, you should archive older plan materials and keep accessible only the currently effective plan materials. However, keeping available annual testing reports and Forms 5500 for a minimum of the three most recent plan years is recommended.
  • Make sure the summary plan description and summaries of material modifications are up to date and understandable by a participant or beneficiary.
  • If you have trouble finding these plan materials, reach out to your retirement plan provider, accountant, or employee benefit consultant.

For each plan that your organization sponsors, consider whether your organization has made all required amendments and whether the plan should be restated. Recently enacted laws like the SECURE Act may require changes to the plan. In addition, consider whether the plan’s operations follow the plan document and are accurately reflected in the summary plan description and summary of material modifications. For example, are participants’ sources of plan contributions consistent with the plan’s definition of “compensation”? You may wish to work with outside counsel on these matters.

Has your organization filed all required forms with the IRS, DOL, and PBGC (if applicable), such as Forms 5500? Has your organization conducted a recent annual testing report, to the extent such testing is applicable? Are there any plan corrections that the organization has implemented or needs to implement? Are there missed contributions that need to be repaid? Both the IRS and the DOL maintain voluntary compliance resolution programs that organizations can often use to correct these types of matters and to bring the plan into compliance.

Impact of the Transaction

Once your proverbial employee benefits house is in order, it’s time to consider the impact of the potential transaction on any retirement plans. If you anticipate the transaction and its effects on any retirement plans that your organization sponsors, that may facilitate discussions with a buyer related to the retirement plan. If it’s an asset sale, the parties may negotiate that the seller will retain the benefit plans and related liabilities, while in a stock sale, the buyer generally takes the plans and related liabilities in connection with the transaction.

In an asset sale where the seller retains the defined contribution plan, but participants in that plan transfer employment to buyer, those participants will experience a separation from service. To the extent those participants have an outstanding loan balance within their defined contribution plan account, that loan will become due and payable in connection with the participant’s separation from service (unless arrangements can be made for the rollover of the loan to a buyer plan), and it may be useful to communicate that to affected participants in advance of the closing of the transaction. In addition, participants separating from service should be provided with a Statement of Accrued and Nonforfeitable Benefits.

In a stock sale, the buyer may request that the seller terminate the plan prior to the closing of the transaction. Terminating a 401(k) plan prior to closing, which generally requires the adoption of a termination resolution by the plan sponsor, will allow the distribution of account balances to the plan’s participants, who can then roll the account balances over to the buyer’s plan. This approach is thought to limit the buyer’s exposure for prior plan noncompliance issues, even though the buyer will still take over the plan and be responsible for winding it up post-closing. As an alternative, the buyer may decide to maintain the plan for a period of time post-closing, either as an active plan for a transition period or as a frozen plan, with the account balances eventually being merged into or transferred to the buyer’s plan.

If employees participate in a defined benefit plan, what is the level of underfunding of the plan? This can be a focal point of any transaction depending on the size of the underfunding. If the defined benefit plan is a single employer plan and well-funded, and the transaction is a sale of assets or a stock sale in which the buyer does not want to maintain the plan, the parties may agree to have the plan terminated in a standard termination, subject to any collective bargaining constraints on termination. That process generally takes 18 to 24 months and involves required notices to participants and to the PBGC. If the plan is less than fully funded on a termination basis, then the parties will need to agree on how to handle the plan’s funding deficit in connection with the transaction—e.g., whether the buyer will assume the plan and reduce the purchase price to reflect its assumption of the unfunded liabilities. It should also be noted that if the plan has a significant amount of unfunded liability, the PBGC may take steps to seek protection for itself and the participants in connection with the transaction, such as requiring additional contributions or the provision of security for the sponsor’s funding obligations.

In a transaction, the signing and closing period can range from 30 days to up to several months, depending on the nature of the transaction. In the interim, it is common for the parties to agree that the organization may not be able to make any changes to the plans or to federal filings, except as required by law or with buyer’s consent. It is crucial that your organization is prepared to act in a prompt and efficient manner at the time of a transaction. Preparing in advance with respect to the organization’s retirement plans allows the deal to proceed more smoothly from a benefits and compensation perspective.