Merging Employee Benefit Plans

In a business combination of two entities, much too often the employee benefit plans are overlooked or mismanaged.  Terminology is important here, especially the use of “merge” and “terminate.”  

We often hear that the employee benefit plan (e.g., a 401(k) plan) of the acquired entity “merges” into the plan of the acquirer.  However, often what really transpires is the acquired employees are provided distribution paperwork containing an option to rollover their accounts from their previous plan into the plan of the acquiring entity.  Thus, the acquired entity’s plan “terminates.”  Other times, the plans are actually “merged” into one plan whereby the accounts of participants in the acquired entity’s plan are transferred all at once to the successor plan.  The proof of the details should be included in the plan amendments or perhaps in the business combination closing documents.  Under either scenario, termination or merger, there is usually an amendment to the plan document that addresses all the necessary details, including the eligibility of the acquired entity’s employees in the acquirer’s plan. 

Often, the most overlooked item in either scenario is the final Form 5500 return for the plan that merged out of existence or terminated.  Generally, the last day of a plan’s existence is the day the last dollar was distributed.  Therefore, the due date of the final Form 5500 return is seven months from the end of the month that all the plan assets were distributed or control of the assets were legally transferred to the other plan, not seven months from the end of that calendar year.  Also often overlooked is the plan’s audit requirement, which still applies for a large plan’s final Form 5500 filing.