Guest view: Retirement plans should be piece of M&A puzzle

2018 was a banner year for mergers and acquisitions. Global M&A activity was the second highest on record, with deals totaling $2.72 trillion. Looking ahead, 76 percent of top executives at U.S. companies expect to close more deals this year than last, and a majority predict these deals will be larger, according to a report from Axios. These companies, and others around the globe, turn to M&A deals to increase market share and improve their business models.

Throughout the M&A process, executives are hyper-focused on company synergies and big-picture goals. As a result, one very important factor often goes overlooked – the employer’s retirement plans. There are many details to consider when acquiring a company. Understanding the seller’s retirement plan and how it will fit within the current benefit structure is vital to success.

If retirement plans are not considered upfront, executives may learn that the acquired company has an underfunded pension plan – which can be a deal breaker – or that the seller’s 401(k) plan does not meet compliance standards.

So, if you’re planning a merger or acquisition, consider the retirement plans now to avoid a headache later on.

If the transaction is a stock acquisition – where the buyer takes full ownership of the selling company – the buyer then assumes all of the seller’s liabilities, including its retirement plan. The buyer has three options for how to handle the acquired company’s retirement plan. It can either maintain its own plan and the seller’s plan separately, terminate the seller’s plan, or merge the seller’s plan into its own plan.

If the buyer decides to maintain both plans, the newly acquired employees can either be offered the same benefits they had previously, or a new formula for their employer benefits. Maintaining both plans can provide employees continuity of benefits with no impact to the buyer’s retirement plan. However, operating multiple plans can be burdensome and expensive, and nondiscrimination testing is needed if employees are receiving different benefit packages.

If the buyer is going to terminate the seller’s plan, this decision should be made and the process initiated before the companies merge. If the acquired company’s 401(k) is terminated after the transaction, the seller’s employees will face a one-year restriction before being able to join the buyer’s 401(k) plan, losing out on a full year of tax-efficient savings and employer contributions.

The main advantages of termination are that employees can be integrated into the buyer’s plan with one benefit structure for all; there is only one plan to maintain; and the risk of any liability transfer into the buyer’s existing plan is avoided. The downside is that the employee accounts become immediately accessible. So, if not rolled over into an IRA or other retirement plan, employees could squander retirement assets and face penalty taxes for early distribution.

The final option – merging the seller’s and buyer’s plans – requires that both plans be the same type and have a similar plan design. This option can be efficient and cost-effective – one benefit structure, one plan to operate – and it also avoids the negatives of plan termination.

The risk associated with merging are the unknown factors of the seller’s plan. Has it always operated in compliance with all the complex rules associated with retirement plans? If not, the buyer’s plan would be at risk.

Before deciding how to handle the seller’s retirement plan, the buyer will need to perform exhaustive due diligence. This includes confirming past operational and procedural compliance, making sure all plan documents are up-to-date, and confirming general compatibility between the plans. Examples include reviewing nondiscrimination testing results from recent years, the seller’s fiduciary oversight practices, administrative operations such as distributions, payroll and loan processes, and fulfillment of government reporting requirements.

Many companies partner with an outside consultant to conduct a thorough benefit plan review and help determine the best option. When experts are engaged from the start, they can help ensure the transition is smooth and employees have a clear understanding of the benefits with their new employer.

An organization’s retirement plan should be a consideration from the early stages of an M&A. Though the evaluation process can be lengthy, it’s better to anticipate issues that could arise, instead of realizing them in the midst of the merger when it might be too late.

John Jeffrey is a consulting actuary, specializing in retirement plan consulting and post-employment health care benefits, for Conrad Siegel, which is based in Susquehanna Township, Dauphin County.