When businesses merge, leaders naturally prioritize financials, culture, and operations. But one critical area is often overlooked, and can have lasting consequences for compliance, employee trust, and deal success: the company retirement plan.
Whether it’s a 401(k), a cash balance plan, or something more specialized, decisions about how to handle these programs can have meaningful consequences for compliance, payroll, employee experience, and even the long‑term success of the deal.
Retirement plans are governed by strict ERISA rules (federal regulations for employee benefits), and the right approach depends on your deal structure, which we’ll get into later.
Understanding those differences early allows you to avoid missteps like running two plans longer than intended, inheriting compliance problems, or unintentionally triggering tax consequences for employees.
Let’s walk through what the stock vs. asset structure means for your 401(k) strategy and how to navigate it thoughtfully.
What to Do with Your 401(k) in an M&A (Stock vs. Asset Purchase)
There are two ways to structure an acquisition. Each one affects your 401(k) plan differently and requires a distinct approach and timeline.
Stock Purchases: You Acquire the Company "As Is"
In a stock purchase, you inherit the seller’s retirement plan as-is. Employees keep their original hire dates and service history, which impacts eligibility and vesting. These details require careful planning before closing.
This continuity can simplify some aspects of the transition, but it also introduces a few critical decisions—especially about what to do with the seller’s plan. In a stock deal, these decisions must often be made before closing.
Here are the key paths available, along with what each entails:
If you want to terminate the seller’s plan:
This approach is commonly considered straightforward when full integration is the goal, but it requires careful planning and timing to ensure compliance.
- Termination must generally occur before the transaction closes.
- Participants must receive required notices.
- The seller must complete final contributions and wind down the plan.
- Employees will experience a distributable event—which can be positive or negative depending on their circumstances.
If you want to merge the plans:
Plan mergers can be effective but require thoughtful planning.
- You must review the seller’s plan carefully for protected benefits and compliance issues.
- Safe Harbor plans may restrict timing—mergers often can’t occur until the next plan year.
- Anti‑cutback rules may require you to preserve certain plan features.
If you keep both plans temporarily:
This seems simpler on the surface but creates extra work.
- Each plan must continue to be tested separately.
- Administrative processes double.
- Differences in plan provisions may create confusion for employees and HR teams.
While each option can work, getting guidance early ensures you select the one that aligns best with the goals of the acquisition and the needs of your workforce.
Asset Purchases: You Choose Which Assets to Take—Usually Not the 401(k)
Asset purchases operate very differently. Here, you generally do not acquire the seller’s retirement plan. Instead, employees you hire enter your business as new hires, even if their day‑to‑day role doesn’t change.
That structure gives you more flexibility, but also more decisions to make.
The first is whether to recognize prior service.
Recognizing service can be a meaningful way to honor tenure and ease the transition, but it can also accelerate eligibility or vesting in ways that have cost implications. You can choose to recognize service for:
- Eligibility
- Vesting
- Both
- Neither
Each option requires a plan amendment and should align with your broader integration strategy.
The second decision is how to guide employees through handling their old 401(k).
Employees won’t have their accounts automatically moved in an asset deal. They will need to choose whether to:
- Roll over to your plan
- Roll over to an IRA
- Leave assets in the seller’s plan (if the plan continues)
- Take a cash distribution
If the seller is terminating their plan, employees may experience a holding period before distributions are processed. Providing clear information about the timeline can help reduce confusion and improve the employee experience.
Finally, loans require special attention.
Even though you aren’t required to accept them, failing to provide a path for loan rollover often results in unintended defaults—leaving employees with taxes and penalties. Allowing loan transfers, when possible, can often provide a smoother experience for employees.
Why Waiting Creates Problems
Many of the issues that arise in retirement plan transitions stem not from the complexity of the rules, but from addressing them too late.
Plans have notice requirements, testing deadlines, and operational constraints that can’t be rushed. Payroll must be aligned before new employees can enter your plan.
And if you discover a compliance issue in the seller’s plan after you’ve merged it with your own, the liability now sits with you.
Just as importantly, employees remember how you handled their retirement benefits. Surprises—especially those involving access to their money—erode trust quickly.
What to Do Between LOI and Close
Once the letter of intent is signed, the retirement plan process should begin. This period sets the tone for everything that follows, and it’s where you can avoid the vast majority of unpleasant surprises.
Here’s how that usually unfolds:
1. Start Retirement Plan Due DiligenceThis involves reviewing plan documents, historical filings, compliance testing, fee schedules, and any known errors. The goal is to uncover risks early and understand whether the seller’s plan is healthy enough to merge—or whether termination is the better path.
2. Decide on the Integration Strategy
Based on your findings, determine whether you may:
- Terminate the seller’s plan
- Merge the plans
- Onboard employees directly into your plan
- Maintain the seller’s plan temporarily (less common)
Each option has timing requirements, especially for Safe Harbor plans or any plan with protected features.
3. Align Payroll and HR Systems
No employees should be allowed into your plan until payroll can support accurate contribution remittances. This is also the time to test auto‑enrollment workflows, confirm eligibility logic, and ensure your recordkeeper is ready for new participants.
4. Develop a Communication Plan
Employees want clarity around what happens to their money. A thoughtful communication strategy, supported by education sessions and opportunities to meet with advisors (something Plancorp can help with), helps them feel supported rather than overwhelmed.
Understanding Your Fiduciary Role
Fiduciary responsibilities shift rapidly during M&A and overlooking them can expose your business to compliance risk.
Many companies choose to delegate investment oversight to a 3(38) fiduciary. Plancorp’s Corporate Retirement Plan team can assume this role, ensuring your plan stays compliant and aligned with best practices.
Opportunities You Can Capture Along the Way
M&A is the perfect time to reevaluate whether your retirement plan truly supports the business owner’s own savings goals. Plancorp helps businesses explore advanced strategies, including profit sharing or cash balance plans, to maximize tax efficiency and strengthen employee benefits.
Many business owners underutilize these tools until they’re prompted to reevaluate by a major event—like an acquisition.
Why Plancorp May Be the Right Partner
M&A is complex enough without navigating ERISA rules and plan design alone. Consider scheduling a 30-minute call with Plancorp’s Corporate Retirement Plan team to explore ways to simplify the process, protect your business, and support employees through the transition.
We have extensive experience helping companies navigate retirement plan transitions during M&A, and we can provide guidance to help you make confident, informed decisions every step of the way.
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