Don’t Forget Qualified Retirement Plans when Considering a Business Sale or Acquisition by Sean Deviney, CFP

Posted on November 25, 2015 by Richard Berkowitz

Mergers and acquisitions involve an exhaustive amount of legal and financial due diligence before a deal can close. Among the preliminary factors both buyers and sellers should consider during this process are the tax-qualified retirement plans each offers to its employees and the implications a merger or acquisition will have on those plans, their employees and their ongoing operations. Depending on the circumstances, both buyer and seller may need to take action before the transaction is complete.

Considerations for Asset Sales and Stock Sales

A business acquisition can take one of two forms: an asset sale or a stock sale.

In an asset sale, the buyer agrees to purchase all or a portion of the seller’s assets, including its employees, which, under IRS rules, results in the seller’s termination of its employees and an existing retirement plan. Consequently, a seller is required to make matching or profit-sharing contributions to an existing retirement plan, regardless of established vesting schedules, to ensure employees become 100 percent vested in all accrued benefits at the time of plan termination. Moreover, plan termination will trigger the seller’s responsibility to distribute plan assets to its participants, who may roll over their benefits to another qualified plan or Individual Retirement Account (IRA). Doing so will require the seller to issue notices to plan participants of their election rights 30 to 180 days before the date of benefit distributions.

Prior to closing, the buyer in an asset sale must determine how it will treat retirement benefits for employees it will continue to employ after the merger/acquisition. The buyer is not required to recognize employees’ prior arrangements with the seller nor any prior retirement plan eligibility or vesting obligations. However, the buyer may elect to amend the existing plan to continue prior coverage or merge it into its own retirement plan, as long as the amendment is in effect before or on the date of the sale.

In a stock sale, a buyer agrees to purchase all of the seller’s corporate stock, including its assets and liabilities, employment arrangements and benefits plans. In effect, employees involved in a stock sale maintain employment and continuation of retirement plan benefits.

However, when both seller and buyer have existing qualified retirement plans in place, the buyer must make a decision. It may opt to terminate its 401(k) plan before the acquisition closes and take advantage of IRS rules that prohibit plans to distribute benefits between the plan termination date and the 12 months after assets are distributed when the employer maintains another defined contribution plan. Alternatively, the buyer may elect to enroll the seller’s employers in its existing retirement plan, at which point the seller must freeze the prior plan to avoid distributions or the buyer must impose a 12-month waiting period on employees to enter the plan after assets are distributed. In both instances, plan sponsors must issue notices to participants detailing the changes in benefits and investment options as well as a 30-day notice of any blackout period exceeding three days, during which time participants will not be permitted to change investments or request a loan or distribution from their plans.

Regardless of the method selected, it is important that the buyer conduct adequate due diligence on the qualified plan of the company it plans to purchase. Merging the plans can create greater economies of scale and drive down the investment and administrative costs of the retirement plan. This potential savings must be balanced against the liability inherited of all historical actions of the acquired company. As sale negotiations progress, your plan consultant should work closely with an ERISA attorney to provide actionable advice on handling the qualified plan.

The professionals with Provenance Wealth Advisors work with businesses of all sizes, through start-ups, mergers and acquisitions, to design benefits plans and implement best practices to meet regulatory compliance and serve the needs of plan sponsors and participants.


About the Author: Sean Deviney is a CFP®* professional and retirement plan advisor with Provenance Wealth Advisors, an independent financial services firm that often works with Berkowitz Pollack Brant Advisors and Accountants. For more information, call (800) 737-8804 or email

Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.