M&A and record retention: what plan sponsors need to know

July 22, 2021

Retaining recordsCongratulations to your organization, on selling (or buying) a business! 

Now comes the fun part: Figuring out what to do with all of those employee records.

When you’re a 401(k) retirement plan sponsor, the question of what to retain through the merger and acquisitions (M&A) process is key. But with all the other tasks involved in the transition, it’s easy to overlook retirement plan document retention issues… and that goes double if you use a third-party administrator.

But the last thing you want to do is let document retention issues slip under the radar, leading to potential non-compliance down the road. Here’s what you should know about retirement plan record retention through the M&A process.

Stock vs. asset sales

Let’s start with some clarification of the type of M&A: stock or asset. The difference may affect record retention.

If a company is acquired through a stock purchase, that means the business remains intact, just with a new owner. The buyer now owns everything associated with the company, and the employees are now the buyer’s employees. It’s like purchasing a house, and all the furniture comes along with the sale.

In an asset sale, the seller still owns the business but certain parts transfer to the buyer. This may include equipment, client lists and property. Employees may be, but aren’t always, hired by the buyer. This type of sale is like buying the furniture, but not the house.

Retirement plan options after a merger

In a stock sale, the buyer will own everything associated with the business… and that means the retirement plan, too. If the buyer doesn’t want to take on the existing plan — say, for instance, they have their own plan they’d like to implement — they must terminate the existing plan before the sale closes.

If they don’t terminate the plan, they inherit it and must assume responsibility. Now the buyer has options for what’s known as a “successor plan”:

  • Separately maintain the acquired plan
  • Merge the acquired plan with the buyer’s plan
  • Freeze the acquired plan, which requires full maintenance but doesn’t require contributions

In the case of an asset sale, the seller retains ownership of the company and responsibility for management of the retirement plan. At this point, the seller may continue sponsoring the plan, partially terminate it (if at least 20 percent of the workforce leaves after the merger) or terminate the plan completely.

Record retention after a merger

Regardless of which plan options are chosen, due diligence is key. That includes document retention.

For most organizations, a seven-year retention policy is standard. However, this rule doesn’t apply to retirement plan documents. If an employee still has an account on your plan, the IRS requires you to keep documents indefinitely.

Documents that contain data such as date of birth and date of hire— such as the I-9, or Employment Eligibility Verification — are especially important to retain. Why? Because the government requires these documents and they contain data that’s key for audits.

Whether you’re the business owner, seller or buyer, this means you have two options:

  • Remove employees from the plan after the M&A is complete
  • Retain their documentation indefinitely

Even if you just sell a business unit or one location, you must retain the documents. For example, imagine you own several nursing homes. You sell one location to a buyer, and purge employee documents after the sale. But then audit time rolls around, and surprise! You no longer have the required documentation and you’re out of compliance, even though you no longer own that location.

The key takeaway: After a merger (even decades later) you need to hold on to personnel records that document benefits based on compensation history. If employees are still in the plan, you’re still responsible for them as participants.

Of course, digital record keeping makes it easier to maintain compliance. Not only can you save on valuable real estate (i.e. no massive filing boxes required), it’s easy to search digital personnel records for an audit.

If you have questions about which plan records to retain during a merger, we have answers! We want to help you stay compliant. Contact us for more information and to schedule your virtual appointment with Cassell Plan Audits at 630.886.7669.

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