Rick Pummill, CLU, QPA, QKA

Rick Pummill, CLU, QPA, QKA

The Retirement Plan Company

Rick has worked over 30 years in the development, management & administration of qualified retirement plans. Rick earned a Bachelor of Arts degree in Economics from Dartmouth College & received his Chartered Life Underwriter (CLU) designation from the American College and his Qualified Pension Administrator (QPA) and Qualified 401(k) Administrator (QKA) designations from the American Society of Pension Professionals and Actuaries (ASPPA). Rick is an active member of ASPPA and the Dayton, Ohio Employee Benefits Group.

It is September 2019 and as the new owner of Sam’s Widgets (the latest division of AAA Manufacturing) you are delighted to see that Sam’s made a profit in the second quarter.  You can’t stop grinning about the business purchase you made a couple of months ago.   There were so many details regarding the transaction you simply did not think about letting The Retirement Plan Company know about this pending transaction.

You and your HR department finally have enough time to enroll your newest employees in AAA’s 401(k) plan. As you begin to deal with the enrollment process your HR director informs you that these “new” employees are contributing to the existing Sam’s 401(k) plan.  She has just learned from her TRPC relationship manager that since the purchase of Sam’s was a stock transaction (and not an asset purchase) not only did you acquire all of the stock of Sam’s but by default are now the plan sponsor of the prior Sam’s 401(k) plan.  AAA, is now in effect, responsible for Sam’s 401(k) plan and its required safe harbor contribution.  In addition, this past week, Sam’s was notified by the Department of Labor that employees have complained about last year’s late deposits of deferrals and the latest 5500 reported there were prohibited transactions.  Surprise!

This story provides a warning for CEOs thinking about future business transactions.  Plan sponsors when possible, should always let those that consult on their qualified retirement plans know in advance when involved in a transaction that could affect their plan – purchase or merge with a company, or sell their business.

Let’s take a look at some basics…

The first thing a plan consultant typically wants to know when informed of a sale or purchase is whether the transaction is an asset sale or a stock sale. Although each specific sale or purchase may be different, there are some generalities that apply to these types of business transactions.

Stock Sale vs Asset Sale

In a stock sale, the acquiring employer purchases another company in its entirety including the legal entity. In so doing, the acquiring employer effectively becomes the employer and, thus, the sponsor of the seller’s qualified retirement plan, if any. If both the acquiring and selling employers have a 401(k) plan at the time of the transaction, the successor plan rules[1] effectively prevent the acquirer from terminating[2] the 401(k) plan of the purchased company once the sale is complete.

[1] Successor plan rules – when a qualified plan is terminated, normally all benefits are distributed.  However, when a 401(k) plan is terminated, the elective deferrals and any other restricted accounts are not permitted to be distributed on account of the plan’s termination if the employer maintains or establishes an alternative defined contribution plan (i.e. successor plan) within 12 months of the distribution of all assets of the plan. IRC §401(k)(10)(A). Related employers are treated as the same employer to determine whether a plan is a successor plan. Employers that are related under the controlled group of business definition in IRC §414(b) and (c), or under the affiliated service group definition in IRC §414(m), are treated as the same employer for purposes of determining whether another plan is a successor plan.

[2] Plan termination – a formal action to discontinue a plan and typically give each participant the right to receive a distribution of their account balance.

In an asset sale, the acquiring company purchases only the assets of the selling company such as equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names and inventory.

The seller retains possession of the legal entity.  As a result, the buyer does not automatically become the sponsor of the seller’s plan, and that might be a good thing if the seller’s plan contains any compliance issues.

The employers may decide during the planning stages that the two 401(k) plans will be merged. Once a transaction is complete, the new owner can merge the two plans together.  In so doing, the surviving plan inherits any past compliance issues of the plan that is discontinued since the acquiring employer is deemed to have sponsored the plan that no longer exists.  Better yet, the attorney examines and completes his due diligence re that plan before the transaction date.  The attorney might discover past issues and advise against a plan merger or find it difficult to measure the extent of any liabilities of past errors and recommend an asset sale in order to protect the buyer against unknown future liabilities.

When either transaction takes place, the acquired employees typically continue working for the acquiring company. Employees do not incur a severance from employment in a stock sale but do in an asset sale. As a result, there is no distributable event with a stock sale in regard to the prior plan of the seller.

In a stock sale, if the acquiring employer does not want to keep the selling employer’s 401(k) plan, the purchase agreement should be written to include a requirement that the seller terminate the plan before the business transaction occurs. If the resolution to terminate the seller’s plan is passed by the board and takes effect prior to the transaction, the seller is responsible for terminating the plan and distributing all plan assets. The distributions can occur even after a stock sale is completed.

In an asset sale, the seller will ultimately determine what will happen to their existing plans.  They cannot force the buyer to merge the plans but could negotiate with the buyer to assume the plan.  It could decide to terminate its plan at any time, there is no successor plan issues to consider since the companies would remain separate employers.  The employees are considered to have terminated employment, have a distributable event and can receive a distribution of all account types.

In both types of transactions, the years of service the employees have with the seller must count (stock sale) or are voluntarily granted (asset sale) toward eligibility and vesting under the acquiring employer’s plan.


During the process of acquiring or terminating a business, employers with retirement plans must decide whether to (1) merge the plans; (2) terminate one or more of the acquired plans; or (3) maintain the acquired plans separately. Various factors, some of which may be outside your control, determine which option best suits your company. The specific circumstances of the merger, acquisition, or termination may make one alternative more desirable than the other, but legal and practical considerations often limit the choices.

Generally, if you follow these three points you will be on your way to a successful transaction as it relates to your qualified plans.

1) If there is a valid reason to continue or merge a seller’s plan in a stock sale, make sure the attorneys representing you in a transaction take the appropriate steps to determine what qualified plans exist for the company you are interested in pursuing, conduct a due diligence of all plan documents, plan assets and past administration of said plans to make certain they comply.

2) Be sure to make every effort to notify your relationship manager at TRPC prior to any mergers/acquisitions or other business activity that you believe might affect one or more of your qualified retirement plans.  And,

3) Often the type of transaction (namely stock or asset sales/purchases) will affect the timing of the actions you will want to take with qualified plans in order to achieve the outcome you desire.

Given the variety of circumstances that may affect your decision on how to best manage qualified plans

during a merger, acquisition or sale, we encourage you to start the process early while the transaction is being developed rather than after it has happened.



Acquisition or Merger?  Don’t Overlook the Seller’s 401(k) Plan!  By Eric Droblyen   May, 17, 2017

401(k) Specialist post by Terry Dunne 6/9/17   Senior Vice President and Managing Director of Retirement Services at Millennium Trust Company, LLC.

Handling Qualified Retirement Plans in Mergers and Acquisitions   by PLC Employee Benefits & Executive Compensation   December 18, 201