How a Merger or Acquisition Affects Your 401(k)

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Corporate mergers and acquisitions can be stressful. When employees hear that their company is part of such a deal, they instinctively worry about their jobs. Even with reassurances that there’s no need to worry about layoffs anytime soon, employees should expect changes in their benefit plans, particularly their 401(k)s or other retirement savings plans.

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Among the closed-door meetings that take place prior to a takeover or merger, it is surprisingly common for benefit plans to be ignored, especially in the small plan market. This can be a disaster for plan sponsors and participants alike.

To best equip themselves to handle the situation, employees must understand the acquisition itself, the impact it will have on their plan and what they can do to prepare.

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Two types of acquisitions

The key driver related to retirement plans is typically the type of acquisition: stock or asset purchase.

If the acquisition is an asset sale, the selling entity retains the responsibility for the 401(k) plan, and those employees retained from the selling entity are typically considered new employees of the buyer. With an asset purchase, it is rare the plans are merged. The plan of the selling entity is terminated or is kept open, and employees who no longer work for the selling company can request a distribution from the selling company plan.

If the acquisition is a stock purchase, the acquirer is purchasing the entity from the seller, including the benefit plans. The employees are usually treated as employees of the buyer, either directly or indirectly. What happens to the plan in this situation can vary based on what the acquirer decides. The potential outcomes for your 401(k) plan in a stock purchase sale are:

Your plan could be terminated.
Your plan could merge with the other company’s plan.
Your plan may stay as is — meaning that both companies have separate plans.

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Two examples to illustrate what can happen

Let’s use some examples to show you how this would look. To keep this simple, let's assume the company you work for is Company A and that the acquiring company is Company B.

Company A’s plan merges into Company B's plan

This event is highly probable with a stock sale. If the acquisition is an asset sale, however, this event is rare. In order for this event to occur in an asset sale, the seller must amend their plan document concurrent with the official acquisition date.

An important note for a stock sale: If the buyer does not want to merge the plans, the seller must terminate their plan before the closing date, which is typically a different calendar date than the close of the acquisition date. Once this date passes, the seller cannot terminate the plan. Three scenarios may happen:

Company A’s plan is frozen and all new contributions go to Company B’s plan (in this scenario you will have two accounts).
Company A’s plan is merged into Company B’s plan (most common).
The companies may maintain both plans separately (the plans are tested as one entity — which can get tricky, but it is the second most common option).

With the most common approach, the plan sponsor must review both plans to ensure certain protected benefits are not eliminated, such as vesting and certain distribution events. Your assets are transferred to the new plan, typically on a predefined date, as soon as administratively possible within a year after the acquisition date. This means you will have a new investment menu, investment adviser connected to the plan and login credentials.

Company A terminates its plan

If Company A terminates its plan, your account will be 100% vested in all company monies and you will be able to request a distribution that is eligible for rollover.

If Company A maintains its plan and you are no longer employed by Company A, you can request a distribution only if you have a distributable event, such as termination of employment. If you start work with Company B, this is a distributable event as you are no longer employed by Company A. Keep in mind that if you do not roll over your monies, you will be subject to taxation, including the early withdrawal penalty if under age 55 at time of distribution.

What you can do

In most cases, the employees not involved in the transaction are surprised by an acquisition. If your employer is part of a merger or acquisition, review all of your benefit plan options. Be aware if you are a participant in a merged plan, the company match or profit-sharing component may change. This will affect your retirement planning and savings strategy.

Talk with your financial adviser about the plan, your contributions, investment choices and other details to make sure you are taking full advantage.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Keith Clark is co-founder and managing partner of DWC - The 401k Experts, founded in 1999. He is the author of "The Defined Contribution Handbook" and was named one of the top five consultants in "Pension Management Magazine."

Clark is also an adjunct professor at the University of Minnesota's Carlson School of Management.