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A recent call with a financial advisor in California is representative of a common question on mergers and acquisitions.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“One of my retirement plan clients is acquiring another business. Both entities have a retirement plan. As the advisor on my client’s current retirement plan, what role should I play in the upcoming acquisition?”
Advisors can play a particularly vital role by making retirement plans a key topic in merger and acquisition (M&A) discussions. M&As rarely proceed with retirement plans in mind. Early discussions typically focus on valuation, operations, and leadership for the combined businesses, while retirement plan decisions, if any, are often deferred until later in the process, or even after closing.
The options available for retirement plans in an M&A situation are highly sensitive to timing. Once an M&A transaction closes, flexibility is significantly reduced, and certain plan design or operational decisions may no longer be available without creating compliance complications.
In general, the structure of the transaction drives the retirement plan outcome:
In a stock sale, typically, the target’s retirement plan is included in the deal.
In an asset sale, the target’s retirement plan, typically, is not included in the deal unless explicitly addressed in the transaction agreement.
After closing, employees of the acquired business may need to be considered when testing the buyer’s plan for minimum coverage because of controlled group and affiliated service group rules. Temporary testing relief may be available under the “transition rule” in IRC §410(b)(6)(C). However, that relief is limited and short-lived (12 to 23 months) and can be easily lost if there is a significant change to the plan during that time. That’s why it is important to consider plan options and seek legal counsel before closing the deal.
Timing is critical. Once the transaction closes, plan adjustments that would have been straightforward pre-closing may no longer be feasible without additional cost and complexity.
This is where financial advisors can add meaningful value. Plan advisors are often among the first to be aware of a potential transaction and are well-positioned to raise retirement plan considerations early. Key questions include:
What are the sponsor’s goals regarding the retirement plans after closing?
What is the structure of the sale (i.e., stock or asset)?
Are the plans up to date for required amendments?
Have compliance issues been identified and corrected?
Should the buyer amend, merge, freeze, or terminate plans before the transaction?
After the sale closes, can the sponsor rely on the transition rule for coverage?
M&A transactions are not solely corporate finance events. They are retirement plan events as well. Advisors who address plan implications early in the M&A process help plan sponsors preserve flexibility and reduce post-closing issues, which lead to better-aligned outcomes.