In this ever-changing business environment, your company may find itself acquiring another organization that has an existing qualified retirement plan. You need to let us know as soon as you are contemplating either a sale or a purchase of another company as there are specific rules that must be followed. The rules differ depending on whether the purchase is of company assets only, or of company stock.

Typically, plans of businesses acquired through a stock purchase become the liability of the buyer, while plans of businesses acquired through an asset purchase stay a liability of the seller, unless the parties involved agree otherwise.

If you are considering the purchase of a company with an existing employee benefit plan, a due diligence examination should be completed, because although the purchase agreement may indemnify the buyer for liabilities due to events occurring prior to the transaction’s closing, for purposes of the government and plan participants, the buyer is responsible for any acquired retirement plans.

During the examination, you should identify any and all employee benefit plans of the new company. For each plan, you should request, where applicable, the plan document, amendments, summary plan descriptions, summaries of material modifications, IRS pre-approved letter, Form 5500 filings, and audit and actuarial reports, as well as documentation of any DOL and IRS audits.

Once you have all available documentation, you will need to assess the health of the retirement plans both in form (documents) and operations (day-to-day operation of the plans). The result of your assessment may impact the terms of the purchase agreement, which will need to address the findings of your due diligence report. The purchase agreement should include a seller representation that all documents and information requested have been provided. The seller should warrant that it will indemnify the buyer for undisclosed liabilities that arise over a certain period subsequent to closing.

We are always happy to assist you with any questions you may have, and we advise that you address these matters with the attorney drafting the purchase agreement before the transaction happens.