Qualified Plans — Treatment in Mergers, Acquisitions and Other Corporate Transactions addresses the impact of certain corporate transactions on tax-qualified employee retirement benefit plans. Corporate transactions can take a variety of forms, including stock sales, assets sales, mergers, spin-offs and bankruptcies. Written by David A. Hildebrandt, Esq., of Kirton & McConkie PC, and Richard P. McHugh, Esq., of Dow Lohnes PLLC, it focuses primarily on the tax qualification and ERISA considerations applicable to qualified retirement plans affected by such transactions and the impact that the form of the transaction (e.g., stock v. asset sale) can have on the analysis and evaluation of employee benefit obligations by buyers and sellers.  

This Portfolio also focuses on the various hidden employee benefit liabilities that a buyer must be aware of in any corporate transaction. While the focus of this Portfolio is on qualified employee retirement plans in major types of corporate transactions, it also highlights certain issues that may be relevant to nonqualified retirement plans and certain types of welfare benefit plans. While the rules governing nonqualified and welfare benefit plans are different from those for qualified retirement plans, the format of the analysis and the method of identifying the issues and alternate solutions are similar. 

This Portfolio provides guidelines to assist practitioners in categorizing the corporate transaction into one of two basic formats: 

• Corporate transactions in which qualified employee retirement plans automatically are affected (e.g., Company A purchases the outstanding stock of Company B, Company A inherits all the employee benefit plans of the acquired company); or
• Corporate transactions that require the parties to affirmatively agree in writing as to any qualified employee retirement benefit plans and liabilities (e.g., Company A purchases some or all of the assets of Company B). 

Also provided is a detailed description of the facts, circumstances, and issues present when dealing with qualified plans in typical types of corporate transactions. Each transaction and each plan has unique attributes that must be addressed. However, a basic understanding of the area will give the reader a perspective from which to evaluate the particular facts and circumstances of any one transaction. The perspective of both seller and purchaser also differ, and each will be discussed. 

Bankruptcy is a corporate event that can lead to one of the corporate transactions that affects employee benefit plans. For example, a bankrupt company may be liquidated pursuant to Bankruptcy Code Chapter 7 and its assets sold to others. In a Chapter 11 reorganization of the company, parts of its business may be spun-off in stock or asset transactions, or the court may order changes to the company's structure that could affect the operation of its employee benefit plans. While bankruptcy issues are not discussed in detail in this Portfolio, the type of transaction ordered by the bankruptcy court generally falls into one of the two categories described above. 

Obviously, the facts and circumstances of any particular transaction affect the category into which the employee benefit plan and the corporate transaction fit. In those cases in which the facts do not allow a clear categorization, the Portfolio points out the risks and suggests courses of action. 

This area of the law is highly specialized, and many of the rules are administrative rather than legislative. The analysis in this Portfolio explains IRS practices and practical alternatives, and it reviews the ERISA regulations, rulings, and case law that control the treatment of employee benefit plans covered by ERISA. ERISA preempts state law and provides a uniform administrative law structure. 

In addition, this Portfolio discusses the plan documents and reporting and disclosure issues involved in a corporate transaction that affects an employee benefit plan.

The Worksheets are a detailed guide for the development of customized documents for any particular transaction and contain due diligence checklists and model contract language for use by buyers and sellers in representative corporate transactions.  The Worksheets contain sample representations, warranties and covenants, and various due diligence checklists for tax-qualified plans, welfare plans, and other miscellaneous programs.  Each transaction is unique, and not all issues apply to each type of transaction. Thus, the sample documents should not be relied upon without the expert advice of legal counsel. 

Qualified Plans — Treatment in Mergers, Acquisitions and Other Corporate Transactions allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.

Detailed Analysis

I. Introduction

II. Overview of Issues

Introductory Material

A. Contract Negotiations

1. Due Diligence

a. Stock Purchase v. Asset Purchase

b. Goals of the Parties

c. Types of Plans

2. Contract Provisions

B. Disposition of Benefit Plans

1. In General

2. Plan Termination

3. Plan Merger

4. Plan-to-Plan Transfer

5. Current Distribution of Benefit

6. Plan Continuation

III. Plan Termination

A. Introduction

B. Internal Revenue Service Termination Procedures

C. Determination Letter Procedure

D. Qualification Issues

1. Permanency

2. Full Vesting; Allocation of Assets

a. Method of Allocation

b. PBGC Priority Categories

c. Agreement to Make Plan Sufficient

d. Discrimination in Allocations

e. Early Termination Rule - Limitation on Allocations on Behalf of Top-25 Employees

3. Reversion of Funds to the Employer

4. Excise Tax on Reversions of Qualified Plan Assets

5. Qualification of the Plan in Operation

E. Plan Freezes

F. ERISA § 204(h) Notice to Participants

G. Partial Termination

1. In General

2. When Does a Partial Termination Occur

a. Employees No Longer Covered by the Plan

b. Future Benefit Accruals and Potential Reversions

c. Vesting, Eligibility, and Other Plan Amendments

3. Defined Benefit Plan Allocation of Funds

4. Relationship of Partial Termination Rules Under the Code to PBGC

H. Complete Discontinuance of Contributions

1. In General

2. Suspension v. Complete Discontinuance

3. Absence of Profits

4. Date of Full Vesting Required

I. Transformation of Plan

1. General Rule

2. Context in which a Discrimination Problem May Arise; Merger in Connection with an Acquisition

3. Testing for Nondiscrimination

IV. Separate Lines of Business

A. Background

B. Overview of the Final Regulations

1. General Rules

2. Particular Rules

C. Deemed QSLOB Status for a Line of Business Acquired in a Merger or Acquisition

1. General Rule

2. Requirements for Application of the Rule

3. Period During Which Rule Applies

D. Administrative Scrutiny Safe Harbor for Certain Mergers and Acquisitions

V. Purpose and Effect of § 414(l)

Introductory Material

A. Scope of Coverage of the § 414(l) Merger Rules

1. Defined Benefit Plans - The “Single Plan” Concept

2. Defined Contribution Plans

B. Merger of Two Defined Benefit Plans Under § 414(l)

1. Overview

2. Miscellaneous Requirements Applicable to Mergers Under § 414(l)

a. Actuarial Valuations

b. Amendment to Plan Benefit Structure

c. Date of Merger or Spin-Off

d. Successive Mergers

e. Data Maintenance - Enrolled Actuary Alternative

f. Merger of Defined Contribution and Defined Benefit Plan

g. Application to Multiemployer Plans

3. De Minimis Rule Applicable to Merger of Defined Benefit Plans

C. Spin-offs

1. Definition

2. Defined Contribution Plans

3. Defined Benefit Plans

a. General Rule

b. De Minimis Rule

4. Notice to IRS of Plan Merger, Consolidation, Spinoff or Transfer

D. Transfer of Assets and Liabilities

VI. Same Desk Rule

VII. Anti-Cutback Rules

Introductory Material

A. Amendments to Eliminate Optimal Forms of Benefit in Defined Contribution Plans

B. Past Service

C. Tax Benefit Rule

VIII. Employee Stock Ownership Plans In Corporate Transactions

Introductory Material

A. ESOP as a Financing Vehicle

B. Qualifying Employer Securities

1. Voting Rights

2. Distributions

3. Put Rights

C. Lateral Transfers from Other Qualified Plans

D. Corporate Advantages of ESOPs

1. Paying Off Debt with Pre-Tax Dollars

2. Tax-Free Reinvestment of Stock Sale Proceeds

3. Motivational Tool

4. Disposing of a Business

5. Leveraged Buyout of Minority Shareholders

E. Fiduciary Concerns

1. Exclusive Benefit Rule

2. Prudence

3. Diversification

4. Prohibited Transactions

F. ESOPs as a Takeover Defense

G. Voting and Tendering of Employer Stock

IX. Correcting Plan Defects Discovered During Due Diligence

Introductory Material

A. DOL Voluntary Fiduciary Correction Program

B. Pension Benefit Guaranty Corporation Correction Programs

1. PBGC Premiums

2. Self-Correction for Late Payment of PBGC Premiums

3. Premium Compliance Evaluation Program

C. IRS Self-Correction Procedures

1. Self-Correction Program (SCP)

2. Voluntary Correction Program with IRS Approval

3. Audit CAP

4. Correction Methods

X. Administrative Government Intervention

Introductory Material

A. DOL Rapid ERISA Action Team for Bankruptcy

B. PBGC Early Warning Program

1. Overview

2. Screening Criteria

3. How the Early Warning Program Works

XI. Sarbanes Oxley Act of 2002 - Application To ERISA Pension Plans

A. Overview

B. Retirement Plan Blackout Periods Generally

1. Prohibition of Insider Trading During Retirement Plan Blackout Period

2. Notice to Plan Participants and Beneficiaries

C. Criminal Penalties Under ERISA § 501

D. Prohibition of Personal Loans to Directors and Executive Officers

E. Accelerated Insider Trading Reports Required

1. Background

2. Change in Time of Filing

3. Electronic Filing Required

XII. Welfare Plan Considerations

A. COBRA and Health Plans

1. General Rules

2. Stock Sales

3. Asset Sales

4. Small Employers Growing into COBRA

B. Flexible Spending Arrangements

C. Retiree Health Liabilities

XIII. Worker Adjustment and Retraining Notification Act

Introductory Material

A. Employer Coverage

B. Employee Coverage

C. When Notice Is Required

D. Exemptions

XIV. Due Diligence Issues

Introductory Material

A. Failure to Consider Fiduciary Responsibilities in the Ongoing Administration of an ERISA Plan

B. Failure to Keep Good Plan Records and Administer the Plan in Accordance with its Terms

1. Working Copy of Plan Document

2. Failure to Keep Plan Records and File Required Reports

3. Prevention

C. Misapplication of a Plan's Eligibility Provisions

1. Exclusion of Eligible Employees

2. Inclusion of Ineligible Employees

D. Failure to Perform ADP and ACP Nondiscrimination Testing for Defined Contribution Plans

E. Failure to Properly Apply a Plan's Definition of “Compensation”

F. Failure to Monitor Mutual Funds, or Otherwise Make Unsupervised Decisions as to Plan Investments

G. Failure to Timely Remit Participants’ Contributions and Loan Repayments to the Plan

H. Charging Expenses Incurred for Settlor Functions to Plan

I. Failure to Review Service Agreements

1. Retention of Float

2. Limitation of Liability/Indemnification

J. Common Benefit Plan Problems to Look for in an M& A Transaction

Working Papers

Table of Worksheets

Worksheet 1 Asset Purchase Agreement Sample Representations Regarding Employee Benefit Plans

Worksheet 2 Acquisition Agreement Sample Employee Benefit Provisions - Example No. 1

Worksheet 3 Acquisition Agreement Sample Employee Benefit Provisions - Example No. 2

Worksheet 4 M& A Due Diligence Checklist

Worksheet 5 General Counsel Memoranda 39665

Bibliography

OFFICIAL

Statutes:

Treasury Regulations:

Department of Labor and PBGC Regulations:

DOL Field Assistance Bulletins:

PBGC Opinion Letters:

PBGC Technical Updates:

General Counsel Memorandum:

IRS Announcements:

IRS Notices:

Treasury Rulings:

Cases:

UNOFFICIAL

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