No matter
the reasons for mergers and acquisitions, it's essential to be careful about
potential problems with the seller's retirement plan.
To avoid
issues after the deal is done, it's best to review the plan early and address
any concerns. By doing this, buyers can identify any critical issues and include
them in the acquisition agreement. In this article, we'll look at how to manage
retirement plans when buying a company.
Key considerations of managing retirement plan liabilities in M&A
In the
mergers and acquisitions process, a buyer may face unexpected liability due to
the seller's retirement plan. To avoid this, the buyer should carefully
investigate the plan as part of their due diligence and address any issues with
the seller early on. The buyer should request key information, including the
following:
● Copies of the plan
● Summary descriptions
● IRS letters
● Trust agreements
● Compliance testing results
● Recent IRS filings
If the
buyer plans to acquire the seller's business through a stock sale or merger,
there are additional issues to consider. In these cases, the buyer generally
assumes the seller's liabilities and must decide what to do with the seller's
plan. Options include:
● Operating it as a stand-alone plan
● Merging it with the buyer's plan
● Terminating it
● Leaving it with the seller
Each
option requires careful analysis to determine the best course of action. If you
need help, join the MNAcommunity.
When a
buyer purchases assets, they usually only take on the seller's retirement plan
responsibilities if the acquisition agreement says otherwise.
Mitigate risks through due diligence
Buyers must carefully analyze the seller's employee benefits and
deferred compensation contracts to ensure a smooth employee transition and
avoid costly mistakes. That's why mergers and acquisitions require due
diligence. Here's what you should review as a part of the process:
1.
Plan documents. It is important to check all documents for compliance with
current laws and necessary compliance amendments and determine their
compatibility with the buyer's current plan.
2.
Defined contribution plans. Buyers should also review the unique
attributes of defined contribution plans, such as 401(k), profit sharing, and ESOPs, for their impact on employees and the
transaction. Non-discrimination testing results should be analyzed for
potential liability.
3.
Defined benefit plans. These documents must be reviewed for
promised benefits and funding levels. A buyer assuming responsibility for the
seller's pension plan must be aware of required contributions and long-term
obligations, such as post-retirement medical benefits.
4.
Fiduciary obligations. Also, it is essential to review the
seller's fiduciary practices for errors or poor practices, such as investment
committee minutes and policies, bonding levels, and timing of employee
contribution deposits.
5.
Plan operations. Plan operations, such as loan and
distribution practices and compliance with governmental reporting requirements,
should also be reviewed. How a plan is operated will influence whether to
maintain or terminate the seller's plan.
Conclusion
In
international mergers and acquisitions, careful risk management of retirement
plans is critical. As this article has explained, the intricacies of dealing
with a seller's retirement plan demand early scrutiny and a proactive approach
to avoid post-deal complications. By methodically addressing potential issues
and incorporating them into the acquisition agreement, buyers can safeguard
against unforeseen challenges.
