Corporate Mergers, Acquisitions, & Spin-Offs Tuesday, April 30, 2013

Transcription

1 Corporate Mergers, Acquisitions, & Spin-Offs Tuesday, April 30, 2013 Ilene H. Ferenczy, Esq., APA, CPS, Ferenczy + Paul LLP Donald Kieffer, Esq., IRS

2 Agenda Coverage Issues Plan Mergers Crediting Service Determining HCEs Dispositions 2

3 M&A BASICS

4 Understanding the Deal Three types of transactions: Stock purchase Asset purchase Merger 4

5 Stock Purchase Stock Acquisition Buyer purchases a majority of the shares of stock of the target If buyer is a company, target becomes a subsidiary Transaction does not change which benefit plans are sponsored by the target (except to the extent that the target participates in the seller s plans) To get rid of the target s plans, generally must terminate the plans 5

6 Asset Purchase Asset Acquisition Buyer purchases all or some of the target s assets and assumes all or some of the target s liabilities Stock remains owned by the sellers: if all assets are sold, company is a shell with just the consideration for the transaction Seller/target remains the sponsor of all plans unless buyer affirmatively adopts them Employees are terminated by seller and hired by buyer (to the extent desired) 6

7 Employees Asset Purchases will generally be eligible for distributions from the seller s plan Concern for seller: partial plan termination Undefined in statute, but applies when a large enough percentage of participants employment is terminated Rule of thumb: 20% decrease Result: full vesting Asset Acquisition (Can apply in stock sale setting, too, if employees no longer participate in seller s plan) 7

8 Company Merger Two Mergers companies combine and one of them or a new company survives the transaction The survivor owns and owes all of what either company owned or owed before the transaction by operation of law The survivor sponsors all employee benefit plans sponsored by either company before the transaction by operation of law 8

9 Company Merger What Do We Suggest? Make sure to understand the transaction and to communicate it to the various service providers Be sure that service contracts survive the transaction Be sure that everyone knows the new structure so that they can help you with the post-transaction transitions 9

10 COVERAGE ISSUES 10

11 Issue #1: Plan of Purchased Company What is going to happen to their plan after the acquisition? Continue indefinitely Continue for a limited time Terminate immediately 11

12 Option #1: Continue Purchased Plan Indefinitely Best Bait, Inc. (B) purchases all of the stock of Spectacular Sushi, Inc. (S) Both companies sponsor a 401(k) plan The companies desire to keep their benefits separate indefinitely Question: Can the two companies continue their separate 401(k) plans? 12

13 Option #1: Continue Purchased Plan Indefinitely Question #1: What do the plans say? If the plan documents cover employees of all members of the controlled/affiliated service group, then the other company s employees will enter the plans regardless of desire Need to make sure that plans read the way we want (i.e., exclude nonadopting members of the controlled/ affiliated groups) 13

14 Option #1: Continue Purchased Plan Indefinitely Question #1: What do the plans say? If amend the plans after the acquisition to eliminate participation of the other entity, the amendment will terminate the transition period for that plan Therefore, if such an amendment is needed, it must be done before the transaction 14

15 Option #1: Continue Purchased Plans Indefinitely Question #2: Can the plans pass 410(b)? To maintain separate plans indefinitely, each plan must separately meet the coverage rules There is a transition period for this: from date of acquisition to the last day of the plan year following the year of acquisition To maintain the transition period: Plans must have met coverage rules before the acquisition No amendments may be made to the plans during the transition period 15

16 Option #1: Continue Purchased Plans Indefinitely Question #2: Can the plans separately pass 410(b)? If the plan is amended, transition period terminates immediately and both plans must meet 410(b) Therefore, plans must go into transition period covering the desired group Amendments made before the transition period begins (i.e., before the transaction) are safe Do all amendments terminate the transition period? 16

17 Option #1: Continue Purchased Plans Indefinitely Question #2: Can the plans pass 410(b)? If B bought S in November 2012, and the two companies plans had calendar plan years, the transition period would run through December 31, 2013 Plans would need to be tested for coverage as of January 1,

18 Option #1: Continue Purchased Plans Indefinitely Can meet coverage: 70% test Average benefits test QSLOB filings 410(b) 18

19 Option #2: Continue Purchased Plan for a Limited Time If the desire is to continue the purchased plan just long enough to get things set up for a merger, usually the transition period will take care of everything Make sure plan documents exclude other employees Make sure that no amendments are made to the plans until the merger is ready to occur (but what about EGTRRA restatements?) 19

20 Option #3: Terminate the Purchased Plan If terminate the purchased plan after acquisition, the 401(k) plan of the buyer will be an alternate defined contribution plan That will prevent the payout of 401(k) deferrals and QNECs upon plan termination Will need to merge at least that part of the plan, or maintain purchased plan as frozen plan 20

21 Option #3: Terminate the Purchased Plan If maintain the purchased plan as a frozen plan: Be sure to amend to stop deferrals in that plan Amend buyer s plan to cover acquired employees after freeze date Can distribute profit sharing, matching contributions so long as they are not QNECs or QMACs 21

22 Option #3: Terminate the Purchased Plan If action is taken to terminate the purchased plan prior to the acquisition, okay to distribute deferrals and QNECs Alternate DC plan is judged at date action is taken to terminate the plan If that action was taken prior to the acquisition, buyer s plan was not alternate DC plan, so no limitations on distributions if handled expeditiously 22

23 What if Asset Acquisition?? In an asset acquisition, the seller maintains the plan (i.e., the buyer only is buying stuff, not stock) Result: if the buyer wants to continue to maintain the prior plan for the acquired entity, it must adopt it as a successor employer 23

24 Example Best Bait, Inc. (B) buys all the assets of Terrific Trout, Inc. (T) from its 100% shareholder, Tom Terrific After the transaction, Tom still owns 100% of the stock of T. The only asset in the company is the money that B paid to purchase the assets All employees have gone to work for B 24

25 Example The plan sponsored by T is still so sponsored All of its participants have terminated employment and may be paid out If B wants to maintain that plan for the employees who used to work for T, it can do so by adopting the plan as a successor employer (and being sure to fix the eligibility section) 25

26 Issue #2: Plan of Buyer Need to make sure that Buyer s plan does not cover acquired employees If it does, need to amend plan prior to the transaction to maintain the transition period If plans to be kept separate indefinitely, need to meet coverage in buyer s and acquired plan 26

27 Buyer s Plan If Buyer s plan is going to cover the acquired employees: Need to enroll the employees Timing may be a challenge see next section for ideas If acquired plan will be merged into buyer s plan, need to do so See next section for ideas 27

28 MERGER OF PLANS 28

29 Merger of Plans Best Bait, Inc. (B) purchased all the stock of Spectacular Sushi, Inc. (S) B wants to merge the 401(k) plan of S into B s 401(k) plan What concerns do we have? 29

30 Question #1: Timing There is generally some time lapse between the acquisition and the merger of the plans What do you want to do with the plans in the interim? Freeze the S plan immediately, and enroll the acquired employees in the B plan? OR Keep the employees in the S plan until the merger of the plans is possible? 30

31 Getting the S Employees into the B Plan Immediately There is nothing that compels the merger of the plans to occur at the same time as the acquired employees begin to be covered by the buyer s plan Can freeze the acquired plan to new contributions, and start new contributions going into the buyer s plan as of the acquisition 31

32 Getting the S Employees into the B Plan Immediately Big consideration: How quickly can you get the acquired employees enrolled? Because they are participating in a different plan, they have no salary deferral elections for that plan 32

33 Creative Solution? Can amend the buyer s plan to provide for automatic enrollment of the acquired employees at the rates shown on attached schedule Put prior deferral rates on the attached schedule Effect: maintain the deferral rates from the other plan while enrollment is pending Negative: will have all money go into default fund? Note: Not an EACA, because rate of auto enrollment is not uniform and does not apply to all employees 33

34 Keeping S Employees in Own Plan See prior section: Amendment to plans may be necessary Need to meet coverage or maintain the transition period during the time that the plans are kept separately 34

35 Issue #2: Merger Processing Need to ensure that the process is organized Want to ensure that no unreasonable delay occurs as this could result in a fiduciary breach that causes losses Want to reduce stress on client and participants to the extent possible 35

36 Merging Plans Need to be very organized in preparation process Coordinate with fundholders and recordkeepers for both plans Do high quality employee communications Remember need for blackout notices days in advance Remember need for 204(h) notices if MP plan is involved 36

37 Merging Plans Need to be very organized in preparation process (cont d.) Will the prior fundholder do cashouts where possible prior to merger? Need to provide enough time for notices to be given and responses received Will a final mailing be made to terminated participants for whom cashouts are not available, soliciting distribution authorizations? Mapping of investments 37

38 Merging Plans Need to be very organized in preparation process (cont d.) Identification of new QDIA Who will prepare final Form 5500 for disappearing plan? 38

39 Merging Plans Use a merger agreement to help identify and determine the answers to issues that will arise Vesting issues Accounts to be kept separate and accounts to be merged Forfeitures from disappearing plan Elimination or preservation of distribution options 39

40 Merging Plans Use a merger agreement to help identify and determine the answers to issues that will arise (cont d.) Eligibility differences Crediting service for eligibility and vesting purposes Special contributions for merged-in participants? 40

41 Merging Plans - Testing If prior year testing, need to do adjustment to prior year ADP and ACP Example: Plan B and Plan T are merged Plan B had 300 NHCEs with prior year ADP of 6% Plan T had 100 NHCEs with prior year ADP of 4% The prior year ADP for the NHCEs is the weighted average of the two groups: (300/400 x 6%) + (100/400 x 4%) = 5.5% 41

42 Merging Plans - Testing If both plans are current year and merger is midyear, three possible options: Test everything in the surviving plan for the year Test both plans through merger date, then surviving plan from merger through end of plan year Test disappearing plan for part of year before merger, then test surviving plan for the full year, reflecting merged-in people as new entrants 42

43 Merging Plans - Testing If plans are not the same testing method: Can change acquired plan to match buyer s plan regardless of normal current year/prior year limitations Do so before the merger Last day to do so: end of transition period 43

44 CREDITING SERVICE 44

45 Asset Purchase Acquired employees are new employees Do not credit service unless plan so provides: Specifically discusses crediting of service for acquired employees; or Plan is amended in connection with acquisition to credit service with predecessor 45

46 Stock Purchase or Merger No guidance Argument for crediting service in buyer s plan Could not exempt service for eligibility if new subsidiary adopted new plan (consistency) Argument against crediting service in buyer s plan: Prior service with acquired entity was not with this controlled group 46

47 DETERMINING HCES 47

48 Asset Acquisition Best Bait, Inc. (B) acquires the assets of Spectacular Sushi, Inc. (S) All of S s employees go to work for B None of S s employees own stock in B 48

49 Asset Acquisition Acquired employees are new Not 5% owner unless they are given stock in the buyer No compensation during prior year Result: no HCEs in year of acquisition (and possibly in year after acquisition, depending on how much compensation is earned in year of acquisition) 49

50 Suppose B Wants to Give Special Contribution to Acquired Employees S sponsored a profit sharing plan to which they generally contributed 10% per year Because S is not going to be in business at yearend, it elects to make no contribution in the year of the sale Former S employees are angry because they will get no profit sharing contribution 50

51 Solution B sponsors a 401(k) profit sharing plan to which it normally contributes 5% of pay B amends the plan for the year of acquisition to give former S employees a contribution that is roughly equal to what they would have received in S s plan (but be careful: cannot exceed 100% of the employees pay from B for the year, due to 415 limits) 51

52 Asset Acquisition Why is this okay? Since none of the former S employees are HCEs in the year of acquisition, the B plan can discriminate in the former S employees favor without violating nondiscrimination rules 52

53 Stock Acquisition/Merger No guidance If plans of acquired entity and buyer are kept separate, might determine HCEs based on preacquisition situation If acquired employees enter buyer s plan or vice versa, need to decide how to handle If use top 20% rule, comingling HCEs may cause former HCEs to cease to be HCEs 53

54 DISPOSITIONS 54

55 Asset Sale Sweet Sleepers (S) sells the assets constituting its Phoenix facility to Bountiful Beds (B) Can the Phoenix employees be paid out of S s plan? Yes, they have terminated employment Only exception: if S s plan does not permit distributions on termination of employment 55

56 Stock Sale Sweet Sleepers (S) has a subsidiary, Terrific Towels (T), that manufactures bathroom towels S sponsors a 401(k) plan in which T is a participating employer S sells all of the stock of T to a third-party buyer Can the S 401(k) plan pay out benefits to the T employees? 56

57 General Rule If a subsidiary participates in a parent s 401(k) plan and the subsidiary is sold, can the plan pay out subsidiary employees? Yes, if: Buyer is an unrelated company Subsidiary accounts are not transferred to buyer s plan (rollovers okay) Subsidiary employees do not participate in parent s plan after disposition 57

58 Problem: How to Comply How does subsidiary participate in parent plan? Plan provides that it covers all employees of related companies; or Subsidiary adopts the parent plan as a participating employer 58

59 Problem: How to Comply If parent plan provides that it covers all employees of related companies, participation by subsidiary terminates concurrently with sale (i.e., no longer related) distributions okay 59

60 Problem: How to Comply If subsidiary adopted the parent plan as a participating employer, it must affirmatively act to stop participation If not done prior to disposition, must wait for employees to terminate employment with former subsidiary to pay out of former parent s plan 60

61 Spin-offs Disadvantages to distributions Participants get money out of plan and are less likely to use it for retirement Participants are likely to be 100% vested due to partial plan termination Therefore, some buyers prefer to have the part of the prior parent s plan that belongs to the sold subsidiary or participants associated with an asset sale spun off and merged with buyer s plan 61

62 Mechanics Documentation must be prepared to spin off the portion of the seller s plan Spin-off agreement is helpful Similar to merger agreement; outlines and resolves significant plan issues Deals with: vesting, forfeitures, eligibility, distribution rights Documentation is then prepared to merge the spin-off portion into the buyer s plan 62

63 Issues What will happen to accounts for participants who are no longer employed? Stay with former parent plan (last employer) Go to buyer s plan How will forfeitures associated with this employee group be used in the buyer s plan? Black-out period, employee communications 63

64 Questions? 64

65 Ilene H. Ferenczy Ferenczy + Paul LLP 2200 Century Parkway, Suite 560 Atlanta, Georgia (678) ilene@ferenczypaul.com Donald J. Kieffer Internal Revenue Service 200 Sheffield Street, FL 3 Mountainside, NJ (908) donald.j.kieffer@irs.gov