When your company is acquiring or merging with another, the due diligence process doesn’t stop at financials or operations. The target company’s retirement plans—especially their 401(k)—carry risks, responsibilities, and decisions that can impact both compliance and employee trust.
Here are the steps you need to take as a plan sponsor navigating an M&A event:
1. Know what you’re buying (or leaving behind)
401(k) responsibilities vary depending on how the deal is structured:
- Stock Sale: The buyer inherits the seller’s 401(k) plan and its liabilities — including potential compliance issues.
- Asset Sale: The seller usually retains the 401(k) plan, unless the buyer explicitly agrees to take it on. Employees are typically terminated and rehired, making them eligible for the buyer’s existing plan.
2. Do your 401(k) due diligence
Ask for—and actually review!—the following before the deal closes:
- Plan documents (including amendments and trust agreements)
- IRS determination letters
- Distributions and loans
- Employment and severance agreements, incentive plans, awards and bonuses, e.g., golden parachute payments
- Testing results (like nondiscrimination testing)
- History of late deposits or penalties
- Any known or pending legal claims related to the plan
Your goal? Uncover any hidden liabilities, such as plan disqualification risks, excessive fees, or operational errors, like incorrect compensation calculations. Here and here are some of the most common mistakes made, so you know what to look for.
You’ll want to document who is responsible for what—so the seller’s mistake or oversight doesn’t become your costly problem later.
3. Understand your options post-merger
You’ll need to make decisions about what to do with the target’s 401(k) plan:
- Keep it: Not common unless it’s functioning well and easy to integrate.
- Merge it: Can simplify administration, but risks inheriting compliance issues.
- Terminate it: Must be done before closing to avoid complex “successor plan” rules. Participants must become fully vested.
- Spin off or freeze: Sometimes used when selling only part of a company.
Each path has pros and cons—so consult with ERISA counsel or an experienced plan advisor early in the process.
4. Document, document, document.
Did we mention… document? Regardless of the option you choose as you move forward from an M&A event, as the successor plan sponsor—to keep, merge, terminate, or freeze/spin off the predecessor’s plan—document the transition thoroughly. Gather all available records from the acquired or merged company’s plan sponsor.
- Create a formal resolution to merge or terminate the plan, with clear dates indicating what will happen when.
- Obtain all records to support the benefits of plan participants. This includes personnel files that support their demographic data, as well as any election forms, etc.
We cannot stress this enough. One of the biggest mistakes we see when auditing plans where the entity purchased another is that there are no records.
If in doubt, ask for it—because it’s better to have more documentation than not enough, when audit time comes. It will make your auditing team much happier… and your life infinitely easier.
5. Beware the transition period trap
The transition period typically begins on the date of the M&A transaction and ends on the last day of the plan year following the plan year in which the transaction occurred.
During this time, you may be eligible for a temporary pass on some coverage testing (IRC Section 410(b)(6)), so that you have time to get your compliance ducks in a row as you perform your due diligence and integrate the new plan participants as resolved. However, this does not exempt you from other compliance rules, such as nondiscrimination testing.
Plan carefully to avoid compliance failures in future plan years.
6. Communicate clearly
This doesn’t necessarily affect your audit, but it will impact the success of integrating new team members. All those incoming 401(k) plans are attached to real humans! Employees will want to know how their retirement benefits are affected. Develop a clear communication plan that outlines:
- What happens to their existing balances
- When they can enroll in the new plan (if applicable)
- Any changes to matching contributions, vesting schedules, or plan features
401(k) plans don’t merge themselves. Even a well-run plan can become a liability if it’s not carefully evaluated and integrated. By addressing retirement plan issues early in the M&A process, you protect your company and keep your employees’ futures on solid ground.
Need more information? Here are some additional resources:
- Got M&A? Don’t forget to consider 401(k) plans in your merger or acquisition.
- 401(k) plan considerations in M&A transactions
- How to do mergers & acquisitions the right way
If you had an M&A event this year, or are planning one, lean into your plan advisors. Don’t wait to start gathering the documentation you’ll need to smooth the transition and for your next audit. Have questions on what you’ll need come audit time? We’re here to help make the process as quick and painless as possible. Contact us today.
Photo by Sora Shimazaki.
