In this exclusive Q&A, 401(k) Specialist sits down with Pete Welsh, Managing Director of Retirement and Wealth at Inspira Financial, to explore the complexities of company mergers and their impact on retirement plans.
It’s natural for employees to express concern or confusion regarding their retirement plans during a merger, often due to fears about how their benefits might be altered, such as potential changes in matching contributions or plan structures. This can lead to a big uptick in requests for plan information and guidance.
In our conversation, Welsh sheds light on what happens when businesses with different retirement plans merge, outlining key outcomes and compliance concerns. He also provides expert guidance on plan terminations and offers insights into how companies can navigate these intricate processes while staying compliant with federal regulations. Read on for practical advice and solutions to ensure a smooth transition during a merger.
401(k) Specialist: How does the merger of two companies affect retirement plans?
Pete Welsh: When a company merges with or acquires another company, there are a few ways the new company can handle the retirement plan:
- If only one retirement plan is involved, then the post-merger company usually becomes the new plan 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 one company may terminate its retirement plan or both may terminate their retirement plans.
401(k) Specialist: Can you elaborate on what happens when two companies—each with its own retirement plan—decide to merge?
Welsh: Sure. In that scenario, one of four outcomes may take place:
- One company can terminate its plan and allow its plan participants to join the retirement plan of the post-merger company
- Both companies can terminate their plans and start a new retirement plan for the post-merger company
- The merging companies can decide to merge their retirement plans as long as they do not violate the anti-cutback rule.
- Both companies may terminate their plans and the post-merger company may decide not to offer a retirement plan
401(k) Specialist: What is the anti-cutback rule?
Welsh: When two retirement plans are merged, the merged plan cannot reduce or eliminate protected benefits, such as accrued benefits, 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 benefits of plan participants.
401(k) Specialist: Here’s a scenario: Two companies are merging; company A has an automatic rollover IRA program, and company B doesn’t. Once the companies merge, can the new company roll over the small-balance accounts from company B into a new 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, including any 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 IRAs, per U.S. Department of Labor guidance.
If the buyer is buying 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 merged with the plan of the buyer’s, 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 automatic rollover IRA program.
401(k) Specialist: It sounds like for most mergers, at least one of the retirement plans typically needs to be terminated. What does that entail?
Welsh: For all defined contribution plans held in trust—401(k)s, 403(b)s, and so on—the termination process is essentially the same and requires a few administrative steps.
- 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 sponsors hire third parties to help them do it.
401(k) Specialist: It certainly sounds complicated and time-consuming. 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
- When plan participants are non-responsive, making 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?
“One of the most challenging aspects of terminating a retirement plan is finding missing accountholders.”
Welsh: One of the most challenging aspects of terminating a retirement plan is finding missing accountholders. 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 IRAs, disburse benefits, manage uncashed checks, and other plan termination tasks as well as search for missing participants.
At Inspira Financial, we look for missing IRA accountholders once a year until we find them.
401(k) Specialist: This has been an insightful discussion. 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, participant notification, disbursements, 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.
401(k) Specialist: Thank you, Pete, for sharing these great insights on company mergers and retirement plan termination.
Welsh: You’re welcome. It’s been a pleasure.
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Inspira Financial disclosure: Inspira Financial Trust, LLC performs the duties of a directed custodian and, as such, does not provide due diligence to third parties on prospective investments, platforms, sponsors, or service providers, and does not offer or sell investments or provide investment, tax, or legal advice.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
