In the exclusive Q&A, 401(k) Specialist Editor-in-Chief Brian Anderson speaks with Pete Welsh, Managing Director of Retirement and Wealth at Inspira Financial, to discuss important implications resulting from the termination of a retirement plan due to a merger or acquisition.
Welsh provides expert insight on how to navigate the maze of intricate processes while staying fully compliant with federal regulations.
401(k) Specialist Editor Brian Anderson: Our topic today is one of the key challenges plan fiduciaries may encounter: terminating a retirement plan because of a merger or acquisition. Pete, can you start off by giving us an overview of why is this such a challenge for companies undergoing a merger or acquisition?
Inspira Financial’s Pete Welsh: Because just a few mergers and acquisitions involving major corporations are in the news, it may seem that only a small number of them occur every year. But the reality is that thousands of mergers and acquisitions occur every year among small and medium-sized companies. There are more than 34 million small businesses in the United States—many of which are owned by individuals who may decide to sell their business or merge with other businesses because they want to pursue something else, they want to live somewhere else, they want to retire, or their capital is depleting. Today I want to share some insight on what happens to retirement plans when companies merge or acquire other businesses.
401(k) Specialist: What effect does a merger between two companies have on retirement plans?
Welsh: When a company merges with another company, there are a few ways the new company can handle retirement plans:
- If only one retirement plan is involved, then the resulting post-merger company usually becomes the new sponsor of that retirement plan.
- If two retirement plans are involved, one company may merge its plan with that of the other company. Then the post-merger company has only one retirement plan covering all employees.
- When both companies have their own retirement plans, what can also happen is that either company may terminate its retirement plan or both may terminate their retirement plans.
401(k) Specialist: Let’s explore the scenario of when two companies—each with its own retirement plan—decide to merge. How can that play out?
Welsh: When two companies with their own retirement plans decide to merge, one of four outcomes may take place:
- First, one company can terminate its plan and allow its plan participants to join the retirement plan of the post-merger company.
- Second, both companies can terminate their plans and start a new retirement plan for the post-merger company.
- Third, both companies may terminate their plans and the post-merger company may decide not to offer a retirement plan.
- And fourth, the merging companies can decide to merge their retirement plans as long as they do not violate the anti-cutback rule.
401(k) Specialist: What is the anti-cutback rule?
Welsh: When an employer is making changes to a retirement plan—including when two retirement plans are merged—the merged plan cannot reduce or eliminate protected benefits that participants have already accrued, such as early retirement benefits, retirement-type subsidies, or optional forms of benefits. The merged plan may result in some changes to administrative terms, but it usually doesn’t have a significant impact on the accrued benefits of plan participants.
401(k) Specialist: Here’s a scenario: Company A has plans to purchase Company B. Company A has an automatic rollover IRA program, but Company B does not. Once the acquisition is complete, can Company A roll over any small-balance accounts from Company B into its rollover program?
Welsh: Yes, but this depends on the particular situation. Often—and this is almost always the case in an asset purchase—the plan that is sponsored by the company that has been purchased will terminate its plan. In this case, the employees from the purchased company simply join the plan of the buyer going forward and are subject to the provisions of the buyer’s plan and the buyer’s automatic rollover program. The plan of the company being purchased, which is being terminated, will be wound up and the participants of that plan who do not otherwise claim their accounts typically have their balances rolled into automatic rollover IRAs.
If a buyer is purchasing the stock of another company, then the buyer is essentially acquiring everything, including the retirement plan, of the seller. When this happens, the retirement plan of the purchased company can be either merged with the buyer’s plan or terminated, and the employees of the purchased company would have access to the provisions of the buyer’s retirement plan. If there are any former employees with small-balance accounts merged into the buyer’s retirement plan, they would be cashed out under the buyer’s automatic rollover IRA program.
401(k) Specialist: Are there any new wrinkles to deal with due to the increasing state mandates that employers provide their employees with a retirement plan?
Welsh: Certainly, state mandates have had an effect on new plan formation over the last several years. Almost any recordkeeper or advisor who works the small to micro market in states with mandates will tell you their business has picked up in this space. However, it is these same small businesses that have the highest frequency of going out of business, or if they survive for a few years are also the most likely to merge or get bought out by a larger firm. In these situations advisors who work the smaller end of the market would do well to understand all the nuances associated with terminating a plan on which they serve as the advisor because the odds are that they will see one or more of their clients needing assistance in this regard.
401(k) Specialist: It sounds like for most mergers, at least one of the retirement plans needs to be terminated. What does retirement plan termination entail?
Welsh: For all defined contribution plans—401(k)s, 403(b)s, and so on—the termination process is essentially the same and requires a few administrative steps. Some of the key steps are as follows:
- First, the employer must amend the retirement plan to establish a termination date, stop employee contributions to the plan, and provide full vesting of benefits for all plan participants regardless of the original vesting schedule.
- Second, the employer needs to let plan participants and beneficiaries know about the plan’s termination and request instruction on how to distribute their benefits.
- Third, the employer must pay any outstanding required employer contributions to the plan.
- Fourth, the employer must arrange to distribute all plan assets as soon as possible after the plan termination date. Note that there is no actual time limit to distribute the assets. But until all assets are distributed, the IRS and the Department of Labor do not consider the plan termination as final. This means that the employer will still have to file tax paperwork and undergo an audit if the plan still has more than 100 account balances.
- And last, depending on the type of retirement plan it has, the employer must submit certain filings to the U.S. government to alert appropriate agencies that the plan is terminating.
Terminating a retirement plan is a complex process, and most plan fiduciaries hire one or more third parties to help them do it.
401(k) Specialist: With final Roth catch-up rules (Roth-only for higher earners) and long-term part-time eligibility now in effect, what payroll/recordkeeper data checks and integrations do you recommend before closing—so a wind-down or merger doesn’t create compliance gaps?
Welsh: Probably the biggest item to consider in this regard is noted above, which is to make sure that any outstanding contributions to the plan are made. These new provisions can be tricky and they certainly add administrative complexity to running a retirement plan which naturally spilled over into terminating a retirement plan as well.
401(k) Specialist: It certainly sounds like a complex process. How long does it usually take to terminate a retirement plan?
Welsh: The time it takes to terminate a retirement plan varies. Obviously, larger retirement plans may take longer to terminate, but smaller plans may take a while to terminate, too. The following issues make terminating a retirement plan of any size challenging:
- Plan participants who are no longer employees and are thus difficult to reach.
- The need to locate plan participants, but their contact information is out-of-date.
- Plan participants who are non-responsive, which makes it difficult or impossible to get their input on how to handle their funds.
401(k) Specialist: What can plan sponsors do to find missing participants and simplify terminating a retirement plan? Does the DOL’s new “Retirement Savings Lost & Found” help?
Welsh: One of the most challenging aspects of terminating a retirement plan is finding missing retirement plan participants. Employers cannot simply ignore missing or non-responsive plan participants. To help simplify that and other tasks involved with terminating a retirement plan, an employer should look for an experienced ally that can seamlessly facilitate and administer automatic rollover IRAs, disburse benefits, manage uncashed checks, and other plan termination tasks as well as search for missing participants.
Inspira Financial is an IRA custodian, so we can custody automatic rollover IRAs for missing participants, and we search for those missing individuals once a year until we find them.
With respect to the DOL’s new Lost and Found registry, we are big supporters of this in concept. It could serve a huge public interest need, once set up and running properly. The problem at the moment is that it is not really set up and the DOL is really struggling with not only how to get the data to do so, but probably just as importantly, how to update the data once they get it. Updating will be critical if the Registry has any chance of living up to its potential.
401(k) Specialist: This discussion has been very insightful. Do you have any closing thoughts on company mergers and what to do with their retirement plans?
Welsh: For companies undergoing a merger, Inspira Financial can help simplify the process of terminating a 401(k) or other defined contribution plan. Our solutions include search services, account notifications, benefit distributions, setup and administration of safe harbor IRAs, and more. Designed to support compliance with Department of Labor guidance, our services will help you seamlessly complete the tasks involved in terminating a retirement plan.
See Also:
- Navigating Merger-Related Retirement Plan Considerations
- How Company Mergers Affect Retirement Plans
- How Retirement and Health Solutions Are Converging
DISCLOSURES
Inspira Financial Trust, LLC and its affiliates perform the duties of a directed custodian and/or an administrator of consumer-directed benefits and, as such, do not provide due diligence to third parties on prospective investments, platforms, sponsors, or service providers and do not offer or sell investments or provide investment, tax, or legal advice.
Inspira and Inspira Financial are trademarks of Inspira Financial Trust, LLC. Inspira Financial Trust, LLC does business as Inspira Associates, LLC in Arizona, California, Michigan, Nevada, Virginia, and Washington.