Navigating Retirement Plan Integration in Mergers and Acquisitions

An organization buying or merging with another organization will have already identified the critical business and financial objectives necessary to proceed with the transaction. Unfortunately, many organizations do not consider the impact of the transaction on the retirement plans of the parties to the transaction until the transactional due diligence is well under way. Below is an overview of the key areas related to the seller organization’s retirement plan(s) to consider as early in the process as possible. 

What Is the Transaction’s Structure?

The transaction’s structure largely determines the parties’ approach to the retirement plans and any associated liabilities. Several issues must be addressed when the buyer intends to acquire the seller’s organization through a stock purchase or a merger. In a stock purchase or the merger of the seller into the buyer, the buyer or surviving entity in a merger will generally automatically assume ownership of the seller’s retirement plan(s). In either of the scenarios above, the parties need to understand their options, including but not limited to taking on the seller’s retirement plan and operating it as a stand-alone plan, merging the seller’s plan into the buyer’s existing plan, terminating the seller’s plan, or freezing the plan.  

The forgoing options raise questions that need to be carefully analyzed and can change the structure of a deal and its terms. Whether the buyer takes over the seller’s retirement plan in an asset acquisition is open to negotiation. An asset deal may require a less extensive due diligence review of the seller’s benefit programs; however, concerns still exist with certain multiemployer defined benefit retirement plans regarding withdrawal liability and/or successor employer liability, which courts and regulators may apply regardless of the deal structure. 

Checklist for Merging or Terminating Retirement Plans in M&A 

It is extremely important to review the plans and consider all available options early in the transaction to smoothly transition the employees. As part of our due diligence process, we see these areas as common and important: 

1. Review of plan documents for compliance with current law and confirm that all required amendments have been executed.
2. Review of plan provisions for compatibility with the buyer’s plan.
3. Analysis of the non-discrimination testing results for potential liabilities.
4. If there is a defined benefit plan, review of the plan and actuarial valuations for promised benefits and any unfunded liabilities and long-term obligations in the plan that may require an adjustment in the seller’s purchase price.
5. Working with the current providers to lay out a plan for termination if the plans are to be terminated.
6. Review of the seller’s fiduciary practices for any errors or poor practices. This analysis will include the compensation used for funding, the timing of employee contributions, committee meeting minutes, and bonding levels.
7. Review of plan operations such as loan and distribution procedures, enrollment procedures, and compliance with reporting requirements.
8. Development of transition timelines and employee communication plans. 

Potential Risks of Poor Integration 

In any merger or acquisition, it is imperative to begin the due diligence review of the sellers’ retirement plans for potential liabilities to avoid any last-minute issues that could delay the completion of the transaction.