Skip to main content

You are here

Advertisement

Case of the Week: Asset vs. Stock Sale — Distribution Opportunity for Plan Participants?

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a Columbia Management wholesaler for the West Coast area is representative of a common question involving a company’s change in ownership and whether a distributable event for plan participants occurs as a result. He asked:

“When two companies merge, does the transaction create a distribution opportunity and potential rollover situation for employees who participate in the companies’ retirement plans?”

Highlights of Discussion

• The potential for plan participants to be able to take distributions following a merger will depend on the following:
— Is the sale of the company an asset or stock sale?
— What does the merger agreement say about the seller’s retirement plan(s)?
• In an asset sale, the acquiring employer typically would not continue the seller’s plan, resulting in termination of the seller’s plan and a distribution-triggering event for its participants. However, the merger agreement could specify that the buyer will assume sponsorship of the seller's plan after the asset sale is complete and, therefore, forestall a distribution-triggering event.
• In a “stock-for-stock” sale, the buyer typically acquires everything — including any retirement plans. In a stock sale, the employees generally would not incur a severance from employment (meaning no distribution-triggering event) as the buyer would most likely assume responsibility for the seller’s plan. The buyer can choose to merge the acquired company’s plan into its own plan or maintain the plans separately.
• With that said, it is possible, in a stock transaction, that the merger agreement could specify that the seller terminate its retirement plan. Plan termination would need to be completed prior to the closing date of the merger. If the plan is terminated in a manner compliant with requirements for plan termination, the participants of the seller’s plan would have a distribution-triggering event.

Conclusion

Generally speaking, a stock sale will not result in a distribution opportunity for plan participants, while an asset sale will, unless the merger agreement specifies otherwise. Financial advisors who can demonstrate their knowledge of distribution triggering events in qualified plans when a change in ownership occurs set themselves apart from the average advisor and are better positioned to assist their clients.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

Advertisement