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How To Handle Mergers and Acquisitions the Right Way

DWC Knowledge Center Article: Getting Mergers and Acquisitions Right for your 401(k) Plan

Congratulations! You’re buying (or selling) a company! Call your lawyer; call your accountant; call your…third party administrator? With all the hullabaloo surrounding this kind of transaction, the 401(k) plan is often overlooked until well after fact, which can leave the parties facing some unintended and often unpleasant issues to resolve.


Before going any further, we should clarify a few terms that will be used in this article. Any reference to “plans” or “retirement plans” generally refer to 401(k) plans specifically. Although many of the same concepts apply to other types of plans, there are also some variations. Second, when we talk about a “transaction,” we are referring to the actual purchase or sale of the business. Last but not least, references to a “stock” transaction assume at least an 80% transference of ownership. There are additional nuances that are beyond the scope of this article when the percentage transferred is below that threshold. Now, back to the article.

If you are the seller and also sponsor a plan, the transaction often determines what, if any, ongoing plan responsibilities you have and how the participants are impacted. The driving force behind these impacts is the type of acquisition — stock or asset — so we will start by reviewing the difference between the two.

The First Critical Question: Stock or Asset?

Acquiring a company via a stock purchase means that the buyer is purchasing the ownership of the entity from the seller. The purchased company remains intact through the transaction but has a new owner(s). Everything owned by the company is now owned by the buyer, and any employees are usually treated as employees of the buyer, either directly or indirectly. If the buyer keeps that entity open and running, it is a separate but related employer (shared ownership but a separate taxable entity). Think of it as buying a house along with the furniture and all the contents.

An asset sale, on the other hand, leaves the seller as the owner and transfers only certain things of value that the seller’s company owned, such as equipment, property (e.g. physical, intellectual), client lists, etc. The seller may eventually shut down the business entirely, but the sale itself does not determine that end result. Employees of the seller can be, but are not automatically, hired by the acquiring entity; however, they are considered new employees of the buyer. Think of an asset sale as buying the furniture out of a house and leaving the current owner with the house itself.

The Asset Sale: A Seller’s Perspective

What do these differences mean when it comes to retirement plans? Let us consider the seller first since the type of sale impacts their options more immediately. Since the seller retains ownership of the company in an asset sale, the seller retains responsibility for the 401(k) plan. As part of the transaction, there may be an agreement for the buyer to assume the plan (via plan amendment) or agree to accept assets via a trustee-to-trustee transfer (via a separate “spin-off” agreement). However, since doing so would result in the buyer likely also assuming the associated risks and liabilities, our experience is that this is a less common outcome. Think audit risk, participant lawsuit risk, unavailable historical records risk, and just general skeletons in the closet risk. If that doesn’t make you shudder….

Assuming the 401(k) plan is not transferred in the sale, the seller may choose to continue sponsoring it; however, it is recommended that they contact their plan consultant to discuss the potential for a partial plan termination if at least 20% of their participating workforce leaves as part of the sale. The seller may also opt to terminate the plan entirely if the goal is to close the business or if there is no further interest in making contributions for any remaining employees. Regardless of the choice, it is the seller’s responsibility to take the appropriate steps.

The Stock Sale – A Buyer’s Perspective

Since the buyer inherits everything in a stock sale, they must ascertain whether the seller has a plan, because it can impact their responsibilities and/or the timing of the transaction. If the buyer does not want to assume the seller’s plan, the seller must, at a minimum, execute a resolution to terminate the plan prior to the sale. This is especially important if the buyer already has its own plan and doesn’t wish to juggle a second one. If the seller does not terminate the plan prior to the sale, not only does the buyer assume responsibility, but they lose the ability to terminate the plan since they have what is considered a “successor plan." 

If the buyer does inherit the seller’s plan, either intentionally or accidentally, there are generally three options going forward.

  • Freeze the acquired plan – requires full maintenance of the plan, including the accounts, documents, annual Form 5500 filing, etc. but prohibits any further contributions;
  • Merge the acquired plan into the buyer’s plan – requires: (a) a close comparison of the provisions of each plan to determine if any changes are needed to accommodate protected benefits and (b) separate accounting of the merged sources; or
  • Separately maintain the acquired plan – requires aggregation for certain compliance tests each year, and depending on demographics, amending the plans to more closely mirror one another.

What Happens To The Employees?

Again, it depends on the type of acquisition. In an asset sale, employees that leave the seller and go to work for the buyer are considered new employees of the buyer. Service with the seller is generally not automatically recognized, which can cause some PR challenges. If the buyer wishes to count past service with the seller for eligibility, vesting, and/or allocation purposes, they must amend their plan to specifically recognize it. Otherwise, the employees “brought over” are treated the same as any “Average Joe” hired off the street.

In a stock sale, the buyer is essentially taking over the seller’s entire business, including the employees who are still at their same desk, doing the same work. In other words, the buyer cannot treat these ‘acquired’ employees as new hires when it comes to the 401(k) plan. Rather, as of the date of the purchase, the buyer must recognize the employees’ service from their original hire dates with the seller (i.e. the newly acquired company) for all plan purposes such as eligibility, vesting, and allocations. There is no amendment to “undo” this service recognition, so it is important for the buyer to understand any compliance and/or financial implications that may result.

In or Out?

It is important for the buyer to consider whether the acquired entity (via stock transaction) will be maintained as a separate company or be merged into the buyer. In other words, will the acquired employees continue to work directly for the acquired company (as a subsidiary of the buyer) or be “transferred” to the buyer itself. This is important, because the employees of related companies (e.g. subsidiaries) are generally not permitted to join the buyer’s plan until a separate joinder or participation agreement is signed. However, they must still be considered as “non-benefitting” employees when performing annual compliance testing. As a general rule, if this non-benefitting group is comprised of more than 30% of the employees (across all related companies), there could very likely be a testing problem.

As a result, if the buyer wants to allow acquired employees to join the plan, they should make arrangements to sign the joinder/participation agreement in advance of the enrollment date. If, on the other hand, the buyer does not wish to provide retirement benefits to these employees, it is critical to project whether that exclusion will cause testing problems for its plan. Note that self-destruction is usually not a risk the moment the sale goes through. There is a transition period that is often available that runs through the end of the year following the year of the transaction so that buyers have time to conduct the necessary analysis and make an informed decision as to how they will proceed. However, that analysis takes time, so waiting until the end of the transition period is not recommended.


It can be exhausting to consider all of the possible twists and turns as you venture down the M&A rabbit hole. So before signing on the dotted line and potentially backing yourself into a corner, do not be afraid to pick up the phone and give us a call. We can help you gather the important facts to make sure your 401(k) and mergers and acquisitions are handled the right way.


Stock Sale

Asset Sale

Buyer's Plan

Acquired employees may participate

Via amendment/ participation agreement if under separate taxable entity; Yes, if a direct employee of the buyer/plan sponsor

Yes, if hired as a new employee of the buyer's company

Service is recognized for:
Eligibility, Vesting, Allocations



Optional (via plan amendment)

Seller's Plan

Plan Sponsorship
(responsibility for maintaining plan)

Transfers to buyer

Retained by seller

Plan Termination (timing)

Prior to sale date; OR plan may be frozen and/or merged but not terminated if buyer maintains its own plan

At any time; seller may continue to operate plan or terminate

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