It's Greek to Me Real Life Mergers & Acquisitions

Transcription

1 It's Greek to Me Real Life Mergers & Acquisitions James C. Paul Adam C. Pozek Workshop 6

2 Introduction The basics Information for evaluation Terminating seller s plan Merging seller s plan Continuing separate plans Dealing with safe harbor plans

3 The Basics Stock vs. Asset Sale

4 The Basics Related Companies Controlled groups Parent/subsidiary Brother/sister Combined Affiliated Service Groups A-org B-org Management

5 Parent/Subsidiary Group One business owns at least 80% of one or more other businesses Single parent may own multiple subsidiaries Group may include several tiers Parent owns subsidiary Subsidiary owns other subsidiaries Slide 5

6 A 100% 50% 80% B C D Parent/Subsidiary Group A 100% 50% 80% B C 35% D Slide 6

7 Brother/Sister Group Five or fewer owners satisfy both of the following: Common ownership of at least 80%, and Identical ownership of more than 50% Owner 3-Hour Tour Island Resort Identical Gilligan 40% 30% 30% Ginger 20% 40% 20% Mary Anne 35% 15% 15% Thurston 5% 0% 0% Professor 0% 15% 0% Common 95% 85% 65% Slide 7

8 Affiliated Service Groups A-org ASG Consists of an A-Organization and a FSO Both A-Org and FSO must be service organization B-org ASG Consists of a B-Organization and an FSO B-org derives a significant portion of its business from FSO, and Provides services to FSO historically performed by employees, and Owned at least 10% by HCEs of FSO Slide 8

9 A-Org Affiliated Service Group Jack Sioux, PC (A-org) Susan Slippe, PC (A-org) Slippe, Faul & Sioux, LLP (FSO) Vincent Faul, PC (A-org) Slide 9

10 B-Org Affiliated Service Group Flintstone s ENT Fred (50%) Barney (50%) [FSO] Simpson s ENT Bart (50%) Milhouse (50%) [FSO] Central Billing Office [B-Org] Scooby s ENT Daphne (50%) Velma (50%) [FSO] Jetson s ENT Astro (50%) Jane (50%) [FSO] HB ENT Hanna (50%) Barbera (50%) [FSO] Slide 10

11 Management Groups Consists of a management organization ( MO ) and recipient organization ( RO ) MO s principal business is to provide management functions for RO No common ownership required Slide 11

12 The Basics MEPs & PEOs A single plan maintained by more than one employer General types of MEPs Plans covering members of associations, franchisees, etc. Plans that are former single employer PEO plans See IRS Rev. Proc Plans covering employers with insufficient common ownership to be a controlled group/affiliated service group Intentional or accidental

13 The Basics Transition Rule Code section 410(b)(6)(C) Test separately until the end of the year following the year of the acquisition No significant changes in plan or coverage

14 The Basics Successor Plan Rule No distributions from terminating plan if there is a successor plan within 12 months 401(k) to 401(k) 403(b) to 403(b)

15 Information Needed to Evaluate A. Buying and selling entities groups, subsidiaries, etc.

16 Information Needed to Evaluate B. Retirement plans on both sides 1. Which employees will come over and participate? 2. Excluded employees union, etc. 3. Contributions/benefits

17 Information Needed to Evaluate B. Retirement plans on both sides 4. Plan assets Where are assets held? Participant directed investments? QDIA? Illiquid assets?

18 Information Needed to Evaluate B. Retirement plans on both sides 5. Plan years calendar vs. fiscal 6. Eligibility who participates in each plan? 7. Status of testing and Form 5500 filings

19 Information Needed to Evaluate C. Correcting defects 1. Who is responsible to correct? 2. Who pays (sanction and/or costs of correction)?

20 Information Needed to Evaluate D. Timing? 1. Closing 2. Board meetings

21 Terminate Seller Plan Prior to Closing Pros Minimizes liability for buyer Distributable event Cons Full vesting Distributable event Extra work in a short timeframe

22 Terminate Seller Plan Prior to Closing Who is responsible? Asset Sale Pre-closing Seller Post-closing Seller Stock Sale Pre-closing Seller Post-closing???

23 Terminate Seller Plan Prior to Closing Notice to employees? May or may not be strictly required depending on plan terms/type Well-informed participants don t sue

24 Terminate Seller Plan Prior to Closing Distributions/Rollovers Will buyer accept rollovers? How to expedite? What about missing participants?

25 Terminate Seller Plan Prior to Closing Will seller accept rollovers? How to avoid deemed distributions? Payments while termination is in process?

26 Terminate Seller Plan Prior to Closing Winding things up Testing Final Form 5500 Residual earnings Uncashed checks

27 Merge Seller Plan Into Buyer Plan Remember When plans merge, all of the history and any errors come with the merging plan

28 Merge Seller Plan Into Buyer Plan A. Merge immediately or run separate plans? End of year may work better Eligibility vs date of asset transfer Use the transition rule?

29 Merge Seller Plan Into Buyer Plan B. Compare plans and preserve protected BRFs Joint and survivor annuity rules? Money purchase accounts JSA and age 62 rules Optional forms of distribution Vesting grandfather vs better of

30 Merge Seller Plan Into Buyer Plan C. Asset Transfer and Blackout Period Target date for asset transfer Map investments? QDIA?

31 Merge Seller Plan Into Buyer Plan C. Asset Transfer and Blackout Period (cont) Blackout notice at least 30, but not more than 60 days in advance Reason for blackout What rights will be temporarily suspended? Beginning and ending dates

32 Merge Seller Plan Into Buyer Plan C. Asset Transfer and Blackout Period (cont) Evaluate appropriateness of current investment choices Contact for questions

33 Merge Seller Plan Into Buyer Plan D. Dealing with outstanding participant loans Employees moving to new payroll system? Need data to start/continue loan payments Recordkeeper/sponsor need to retain loan documents and amortization schedule Delay/interruption how to handle?

34 Merge Seller Plan Into Buyer Plan E. When do deferrals/contributions stop/start? Continue same deferral elections? Auto enroll? Auto escalate? Will deferrals start before blackout period ends? Interruption in deferrals for new employees?

35 Merge Seller Plan Into Buyer Plan F. Testing Issues Mid-year plan merger?

36 Merge Seller Plan Into Buyer Plan G. Vesting and Hire Dates Use original hire dates for seller employees who come over? If new hire dates, how will prior vesting service be tracked?

37 Merge Seller Plan Into Buyer Plan H. Final 5500 for Disappearing Plan 7 months from date asset transfer is final Audit required? Complete section about plan/assets merged/transferred Who will sign?

38 Continue Running Separate Plans Asset sale No problem Unrelated employers so no combined testing Stock sale May or may not work based on testing

39 Continue Running Separate Plans Remember the transition period Only applies to coverage Know when it ends Each plan has it s own

40 Continue Running Separate Plans Make sure that all employees are not eligible for all plans Standardized prototypes Read the fine print Employee transfers

41 Continue Running Separate Plans Crediting service in other plan? Stock sale = required Asset sale = optional Check document and amend as needed

42 Continue Running Separate Plans Can plans pass coverage separately? Yes = able to run separate plans No = cannot run separate plans unless they are mirror plans To pass coverage separately Denominator = nonexcludable employees of the entire group Numerator = just one plan s benefitting employees Each plan tested this way and each must pass Slide 42

43 Continue Running Separate Plans Group consists of plans A & B Plan A Test Benefitting NHCEs A Non-excludable NHCEs A+B Plan B Test Benefitting NHCEs B Non-excludable NHCEs A+B Benefitting HCEs A Non-excludable HCEs A+B Benefitting HCEs B Non-excludable HCEs A+B Both must pass! >= 70% Slide 43

44 Continue Running Separate Plans A B Total 1. Total Employees HCEs HCEs Benefiting EEs Ineligible by Statute 4a. Age b. Service c. Union d. Non-resident Aliens Testing Total (Subtract 2 & 4 from 1) Other NHCEs Not Benefiting NHCEs Benefiting Slide 44

45 Continue Running Separate Plans Group consists of plans A & B Benefitting NHCEs A = 160 Company A Test Benefitting HCEs A = 16 Non-excludable NHCEs A+B = 280 Non-excludable HCEs A+B = 20 NHCE Ratio HCE Ratio = =.8000 Ratio Percentage = 71.43% PASS Slide 45

46 Continue Running Separate Plans Group consists of plans A & B Benefitting NHCEs B = 70 Company B Test Benefitting HCEs B = 4 Non-excludable NHCEs A+B = 280 Non-excludable HCEs A+B = 20 NHCE Ratio HCE Ratio 70 = =.2000 Ratio Percentage = % PASS Slide 46

47 What Can You Do With 401(k) Safe Harbor Plan? A. Terminate Buyer plan prior to close Safe harbor feature goes away Participants must do roll over to move accounts to Buyer s plan Wind up seller plan Loans?

48 What Can You Do With 401(k) Safe Harbor Plan? B. Merge into non-safe harbor plan 1. Mid-year must comply with rules for reduction/cessation Economic loss, or

49 What Can You Do With 401(k) Safe Harbor Plan? B. Merge into non-safe harbor plan 1. Mid-year must comply with rules for reduction/cessation Maybe language in safe harbor notice Supplemental notice 30 days Opportunity to modify deferral elections Plan must pass ADP test for whole year

50 What Can You Do With 401(k) Safe Harbor Plan? B. Merge into non-safe harbor plan 2. Run to end of PY and amend to eliminate safe harbor feature Good practice to give written notice to employees that safe harbor will cease

51 Cash Balance Plans and Combined Plans A. Starting to see more of these medical groups and lawyers B. Timing if seller plan is to be terminated? C. Who is responsible to fund and complete termination? D. Watch out for cross-tested plans

52 QUESTIONS? James C. Paul Paul Benefits Law Corp Adam C. Pozek DWC-The 401(k) Experts , x. 107