Retirement Plans Need to Be Considered in M&As

All too often, a firm conducting a merger or acquisition (M&A) fails to weigh the options for each organization’s retirement plan.

Human resources, the chief financial officer and a Employee Retirement Income Security Act (ERISA) attorney need to assess the costs and benefits of the respective retirement plans of both the buyer and the seller to determine if the plans should remain separate, be combined or if one of the plans should be terminated. Failure to do so until after the M&A deal closes results in very few options, and typically forces the seller to foot the bill for both plans.

That was the overriding message of a webinar titled “The Impact of Mergers and Acquisitions on Retirement Plans” hosted by AHA Solutions, a subsidiary of the American Hospital Association, and sponsored by Transamerica Retirement Solutions. The webinar highlighted the results of a recent, 90-question survey of 104 hospital administrators conducted by Transamerica.

Mergers and acquisitions in the health care market are quite frequent, according to the survey; nearly one in four (37%) respondents said their organization had undergone a merger or acquisition. And 42% of the retirement plans in an acquired organization are served by a retirement plan adviser, the survey found.

When conducting an M&A, it is “critical that the impact to the employee program is understood so that unanticipated costs, and administrative and legislative complexities are understood,” said Lynette Jeffrey, vice president of client compliance and consulting at Transamerica.

There are three primary types of business transactions resulting from M&As, Jeffrey said. “The first is a stock sale, where the buyer acquires the seller,” she said. “Generally, the acquired company will cease to exist. In this case, there are four options: maintain the seller’s plan, merge the buyer’s and seller’s plans, terminate the seller’s plan or freeze the seller’s plan.”

The second type of M&A is as asset sale, whereby “the seller will continue to exist as a separate entity,” Jeffrey said. In this case, “the buyer is not responsible for the seller’s retirement plan.” However, if they are interested in consolidating benefits, that can be negotiated, she said.

The third type of M&A transaction is a “disposition or spin-off.” In this case, the retirement plan covering the people in the portion of the business being sold is transferred to the buyer, who has the option of leaving it as a standalone plan or merging it into its own retirement plan, she said.

Only “like” plans can be merged or consolidated, Jeffrey said. In addition, it is important to note that non-for-profit entities can sponsor both 403(b) and 401(k) plans, but for-profit entities cannot sponsor 403(b) or 457 plans, Jeffrey said. As well, non-ERISA plans can be converted to ERISA plans, but the reverse is not true: generally, ERISA plans cannot be converted to non-ERISA plans.

In the event of a merger, retirement professionals, consultants and advisers have an excellent opportunity to help the buyer assess and compare its retirement plan with that of the seller, and can do so by signing a confidentiality agreement, Jeffrey noted. “Mergers are complex, and as there are many moving pieces, you need the expertise of people with diverse backgrounds,” she said.

The adviser must be sure to “understand the nature of the transaction and the potential impact to the organization’s overall structure.” Next, they must “request copies of plan-related documents—that means all plan documents and amendments, the trust document, the loan policy document, all determination or opinion letters, the required legal notices that have been distributed, administrative manuals, 5500 testing results, service agreements and contracts, inquiries from the IRS or DOL, and current employer-level reports detailing the assets of the plan.”

The adviser must then do a thorough due-diligence compliance review of both plans. “Such discipline will enable you to gain insights into costs, and prevent the tainting of plan assets or taxable distribution of plan assets,” she said.

“Next, it is important to determine the transition period, to look at similarities and differences in the plans, to identify which benefits must be protected,” and in the event of any change, “to request projections to determine cost impacts and nondiscrimination testing for the plan sponsor,” she said.

“Review investment contracts as well,” Jeffrey continued. “Identify contract terms and surrender penalties, provider and investment fees. Are there investments suitable for holding as retirement assets? Do they comply with IRS regulations? How much notice is needed for termination, and must it be in writing?”

Undoubtedly, the two plans will have different recordkeepers, so advisers need to help the sponsors of the plans select the recordkeeper with the most robust services and lowest fees, Jeffrey noted. “Advisers can help with these decisions to ensure the chosen solution is the best fit for participants,” she said.

If a change is being made, “legal notices must be distributed in a timely manner to participants,” she said. “If there is a blackout period greater than three days, the employer must send out a notice.”

Lastly—and most important, from the participants’ point of view—individual balances being transferred to a new plan must be equivalent to the fair market value of the previous plan. Once participants learn of a merger and process that information, they will have questions about their retirement plan and the impact to them, Jeffrey said.