How to manage retirement plans during a merger and acquisition Featured

7:28pm EDT September 2, 2013
Don Dalessandro, QPA, QKA, Vice President of Finance, Tegrit Group Don Dalessandro, QPA, QKA, Vice President of Finance, Tegrit Group

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During a merger and acquisition (M&A), both the buyer’s and seller’s retirement plans have ramifications on the deal and its aftermath.

“Make sure you get the right people involved in advance of any acquisition, whether you’re a buyer or seller,” says Don Dalessandro, QPA, QKA, Vice President of Finance at Tegrit Group. “It can be difficult because some people are not privy to this information, but if the CEO, CFO and others doing the deal don’t understand the plan, they should involve somebody that does before it comes back to haunt them.”

Smart Business spoke with Dalessandro about handling retirement plans in an M&A.

Why involve a plan administrator early in the M&A process?

A plan administrator can help with the financial and fiduciary due diligence, laying out the costs and liabilities associated with both retirement plans and how they match up. For example, if your company provides a 4 percent match, but the seller only gives a 1 percent match, you may need to calculate the extra cost of bringing newly acquired employees into the plan.

Retirement plans also have notification requirements. If a buyer or seller plans to merge or terminate a plan, it must follow Employee Retirement Income Security Act (ERISA) regulations. Examples are 30-day participant notifications prior to certain plan changes or a ‘blackout’ period where participant access to plan features may be curtailed. Also, if you terminate a plan, all participants must be 100 percent vested in all plan accounts, which could be an additional cost.

As a buyer, what else should be considered?

Think about whether it’s going to be a stock or asset purchase. If it’s a stock purchase and you absorb the selling company’s plan, you take on many of the risks and liabilities from previous years. In many cases, the buyer may request that the seller terminate its plan prior to the sale. This takes time and coordination, and may adversely impact participants’ retirement goals — as much of the plan participants’ money may be spent or used for other purposes.

With an asset purchase, even though you are not taking on liabilities, you still must consider the companies’ cultures and how to best integrate by comparing plan provisions, such as eligibility, matching contributions, vesting, etc. Whether you merge plans or not, you will likely change certain provisions of your plan as your company is growing and changing as a result of the acquisition.

You will want to understand who the decision-makers are, such as trustees, plan administrator, custodian, record keeper and others who may be making fiduciary decisions. Making a change to the decision-makers may require committee resolutions and amendments, which may be beneficial prior to the acquisition.

How should due diligence be conducted?

As a buyer, make sure the seller has administrated the plan according to ERISA regulations. Ask for prior Form 5500s. Companies with 100 or more plan participants are generally required to have audited financial information as part of the Form 5500 filing. Also, ensure that timely contributions have been made. There is appropriate fiduciary liability bonding, and an investment or retirement committee with meetings and written minutes. The company should be following proper procedures and policies, and all documents are in compliance and signed.

A possible deal breaker is an underfunded defined benefit plan, which promises to pay certain monthly benefits. If the liabilities are too high, it becomes difficult to terminate the plan. Additionally, it may require that you continue to fund and contribute to the plan, which can be expensive going forward.

After the sale, what’s critical to know?

In addition to following ERISA, if you maintain two separate plans by the last day of the plan year following the year in which the two companies merged, a coverage test runs on both.

If the plans have different matching structures, eligibility rules or provisions, they must meet the ‘benefits, rights and features’ test as a single entity. This ensures you don’t discriminate in favor of highly compensated employees. Many people forget, and then two years later realize they never did the testing. Like many of these decisions, it takes careful planning.

Don Dalessandro, QPA, QKA, is Vice President, Finance at Tegrit Group. Reach him at (330) 983-0527 or don.dalessandro@tegritgroup.com.

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