Companies that are parties to a corporate merger or acquisition must consider legal and practical issues under the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA) relating to the qualified retirement plans involved in the transaction. Significant liabilities on both the buyer and seller side of a transaction can result if the parties do not:
This Article highlights the top ten legal and practical issues that practitioners should consider in dealing with qualified retirement plans in mergers and acquisitions. For an in-depth look at retirement plans in mergers and acquisitions, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions.
1. Controlled group liability
Under ERISA, assets of any member of a controlled group can be applied toward liabilities of any employee benefit plan within the controlled group on a joint and several basis. The buyer should be aware of whether the target company or any of its controlled group members contribute to any single employer defined benefit plans, multiemployer plans and multiple employer plans because many significant potential liabilities are joint and several among the employer and its controlled group members, including:
The seller or target, or both, will typically be required to make representations that there are no material controlled group liabilities.
For more information about controlled group liability for retirement plans, see Practice Note, Qualified Retirement Plans in Mergers and Acquisitions: Controlled Group Liability. For more information on controlled groups generally, see Practice Note, Controlled Group and Affiliated Service Group Rules.
2. Multiemployer plan withdrawal liability
Multiemployer plan withdrawal liability has traditionally been one of the most complicated issues for the parties to a transaction to handle.
In a stock sale, a complete withdrawal does not typically occur because the employer doesn't change. However, the buyer succeeds to the entire contribution history of the target company, which will be used to calculate its liability if it withdraws from the plan any time after closing.
In an asset sale, a complete withdrawal occurs if the target makes no additional contributions to the plan after closing and a partial withdrawal will occur if the target continues making some contributions to the plan.
In any transaction involving multiemployer plans, the buyer must determine how the plan assesses withdrawal liability and determine the extent of its potential liability. It should also be aware of the following exceptions:
For more information, see Practice Note, Multiemployer Pension Plans.
3. Single-employer defined benefit plan liabilities
The buyer's counsel should determine if the target company sponsors or contributes to any defined benefit plans. Defined benefit plan issues are difficult to address because:
The PBGC monitors certain companies with underfunded defined benefit plans and has the ability to impose liens or force plan terminations if it determines that a transaction could significantly increase the PBGC's risk of loss.
4. Partial terminations
If an entire business unit, division or subsidiary is being sold and a significant number or percentage of employees participating in the target company's qualified plan are terminated and no longer eligible to participate in the plan, a partial termination may occur.
If a partial termination occurs, the affected plan participants must be fully vested under IRC Section 411(d)(3). If the likelihood of a partial termination of a plan is significant, the seller may agree to fully vest the affected participants to avoid this issue.
Parties to a transaction should keep in mind that a partial termination can also occur due to:
5. ERISA reportable events
Sponsors of defined benefit plans are required to provide the PBGC with written notice of certain "reportable events" under ERISA Section 4043 within 30 days after the event. Advance 30-day notification is required for certain non-public plan sponsors.
The PBGC may assess penalties of up to $1,100 per day that the notice should have been provided. The parties to a transaction involving a defined benefit pension plan:
For a discussion of reportable events that commonly arise in transactions, see Practice Note, Qualified Retirement Plans in Mergers & Acquisitions: Reportable Events.
6. Plan qualification defects
A buyer will usually encounter and may become liable for qualification defects under IRC Section 401(a) in the target company's retirement plans. There are significant tax consequences if any plans sponsored or contributed to by an employer are disqualified under the IRC.
Typically, the only way the buyer may ensure that a plan is qualified in operation (absent conducting an audit, which is often not possible) is by requiring the seller to make representations and warranties in the purchase agreement to this effect. To the extent there are any qualification defects, the parties should determine if and when the defects should be corrected (see Practice Note, Correcting Qualified Plan Errors under EPCRS).
7. ERISA fiduciary issues
Fiduciary issues can be difficult to identify during due diligence but may represent significant potential hidden liabilities. Buyers should examine the target's plan documents and operations to ensure that there are no significant potential claims for a breach of fiduciary duty under ERISA, by:
The parties will typically include a representation in the purchase agreement that the seller or the target has complied with these laws.
8. Plan loans
Many asset sales involve a buyer purchasing a business unit or subsidiary of a large company that maintains a 401(k) plan at the parent level that permits participants to take plan loans. The transaction generally triggers a termination of employment of the employees of that subsidiary or unit and, absent further action, the plan loans become immediately due and payable under the plan's loan policy (see Standard Document, 401(k) Plan Loan Policy ).
In this situation, the buyer typically agrees to cover the transferred employees and transfer related plan assets (including outstanding plan loan balances) to its own defined contribution plan.
Trust-to-trust transfers may not be possible if the target's plan includes a distribution event or optional form of benefit which the buyer does not wish to include in its plan or if the plan vendor does not accept loans. In this case, the target company or the buyer can make a bridge loan to participants to p ermit them to repay their loan under the seller's plan before distribution.
9. Designing post-acquisition plans
The parties to a corporate transaction have several options in connection with the target company's qualified retirement plans, including:
10. Providing required notifications and notices to employees and government agencies
Once the buyer and seller agree on an approach to the qualified retirement plans at stake, they:
The parties may also be required to send required legal notifications before or after closing, such as a:
Gia Norris joined Practical Law from Roberts & Holland LLP, where she was an employee benefits and executive compensation attorney. Previously she was an employee benefits and executive compensation attorney at both White & Case LLP and Proskauer Rose LLP.
Reprinted with permission from the Association of Corporate Counsel 2014 All Rights Reserved