Qualified Plans — Treatment in Mergers, Acquisitions and Other Corporate Transactions (Portfolio 364)

Tax Management Portfolio, Qualified Retirement Plans — Mergers, Acquisitions, and Other Corporate Transactions, No. 364-2nd, addresses the impact of certain corporate transactions on tax-qualified retirement benefit plans (“Qualified Retirement Plans”). 

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Tax Management Portfolio, Qualified Retirement Plans — Mergers, Acquisitions, and Other Corporate Transactions, No. 364-2nd, addresses the impact of certain corporate transactions on tax-qualified retirement benefit plans (“Qualified Retirement Plans”). Corporate transactions can take a variety of forms, including, among others, stock sales, assets sales, mergers, spinoffs, reorganizations, and bankruptcies. This Portfolio focuses primarily on the tax qualification and ERISA considerations applicable to Qualified Retirement Plans affected by corporate transactions as well as the manner in which the form of the transaction (e.g., stock sale v. asset sale) can affect the parties’ employee benefit obligations. This Portfolio also focuses on the potential hidden employee benefit liabilities that the parties must be aware of in any corporate transaction.

The Worksheets included herein are intended to complement the main discussion of this Portfolio by incorporating relevant supplemental materials, including sample representations, warranties and covenants, due diligence checklists and other related guidance for Qualified Retirement Plans, welfare benefit plans and other employee benefit plans and programs.

This Portfolio may be cited as McGrady, 364-2nd T.M., Qualified Retirement Plans — Mergers, Acquisitions, and Other Corporate Transactions.


John E. McGrady, III

John E. McGrady, III, B.S., Indiana University of Pennsylvania (1986); J.D., Cum Laude, Duquesne University (1994); member, American Bar Association, Section of Taxation (Employee Benefits Committee), Pennsylvania Bar Association and Allegheny County Bar Association; member, National Association of Stock Planning Professionals; Certified Public Accountant, Maryland (1988).

Table of Contents

Detailed Analysis
I. Introduction
II. Overview of Issues
Introductory Material
A. Contract Negotiations
1. Due Diligence
a. Stock Purchase vs. Asset Purchase
b. Goals of the Parties
c. Types of Plans
d. Common Benefit Plan Problems to Look for in a Corporate Transaction
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 Benefits
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 I.R.C. to PBGC
H. Complete Discontinuance of Contributions
1. In General
2. Suspension vs. 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/Coverage
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 Spinoff
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. Spinoffs
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 Employee Plans Compliance Resolution System
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. 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. Service Agreements
1. Retention of Float
2. Limitation-of-Liability/Indemnification
3. Disclosure by Service Providers

Working Papers

Table of Worksheets
Worksheet 1 Sample Employee Benefit Representations — Asset Purchase Agreement
Worksheet 2 Sample Employee Benefit Representations — Stock Purchase Agreement
Worksheet 3 Acquisition Agreement Sample Employee Benefit Provisions
Worksheet 4 M&A Due Diligence Checklist
Worksheet 5 IRS Employee Plans Guidelines, Plan Terminations
Worksheet 6 Sample UWC — Plan Termination — Defined Contribution Plan