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

Tax Management Portfolio, Qualified Plans — Treatment in Mergers, Acquisitions and Other Corporate Transactions, No. 364, addresses the impact of certain corporate transactions on tax-qualified employee retirement benefit plans.

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Tax Management Portfolio, Qualified Plans — Treatment in Mergers, Acquisitions and Other Corporate Transactions, No. 364, 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. This Portfolio 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.


David A. Hildebrandt

David A. Hildebrandt, B.S., Brigham Young University (1967); J.D., Order of the Coif, University of Wisconsin (1970); note and comment editor, Wisconsin Law Review (1970); member, American Bar Association Section of Taxation, District of Columbia Bar, State Bar of Wisconsin, U.S. Supreme Court; Certified Public Accountant, Wisconsin (1974).

Richard P. McHugh

Richard P. McHugh, B.A., Georgetown University (1977); J.D., Georgetown University Law Center (1980); member, American Bar Association Section of Taxation (Employee Benefits Committee), District of Columbia Bar Section of Taxation (Employee Benefits Committee), State Bar of Ohio, Southern Employee Benefits Conference (President, 2001).

Table of Contents

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

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




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: