When a company is acquired or sold, one of the first questions to ask about the handling of the qualified plan is “Was this an asset or stock sale?” Although each transaction may be somewhat unique, there are some general rules regarding these business transactions.

As to whether there is a severance of employment or not, there are some rules to understand and apply when there is a stock sale that may be different from when there is an asset sale.

There are also some important and sometimes subtle differences in what an employer may do in a stock sale versus an asset sale.

If the sale is a stock sale, the employer who is purchasing another company has also acquired the qualified retirement plan. If both employers have 401(k) plans, after the stock sale, the acquiring employer may not terminate the plan of the company acquired because of the successor plan rules. If the acquiring employer wished to terminate the 401(k), the seller would have had to terminate the plan before the transaction closed.

In the planning stage, many times an employer has already decided that the two 401(k) plans will be merged together. Once the stock sale transaction is complete, the new owner has the ability to merge the two plans together. Whether the employer has decided to merge the two plans together or not, there is a coverage transition rule found in IRC Section 410(b)(6)(C)(ii) that permits the acquiring employer to operate both plans separately during a transition period. The transition period ends the last day of the year following the year of the acquisition. The transition rule is available if two conditions are met. The first condition is that both plans are able to pass coverage as of the day before the acquisition. The second condition is that there is no significant change in coverage, other than any change directly resulting from the acquisition, nor a significant reduction in the benefit provided. If such a change does occur, the transition period ends prospectively at that point and the plans are considered as one.

More in future articles.