401(k) Due Diligence for Acquisitions

As if the idea of an acquisition is not complicated enough, there are a handful of items to consider when acquiring another firm that is offering a 401(K) plan to its employees.

Type of Sale. Is the sale a sale of the ‘assets’ of the company, or is it a ‘stock’ sale? If it is an ‘asset’ sale, you do not typically assume the responsibility of the retirement plan currently operated by the acquired business. After the sale has closed and employees of the company become employees of your company, those employees would have the ability to roll their money into an individual IRA or roll their money into your company’s 401(k) Plan. Either way, at CoSource Financial Group, we will assist those employees along the way.

If the sale is ‘stock’ sale and it is your wish to shut down the plan, it would need to be shut down prior to the sale. Most likely, you will want to keep the plan up and running and then merge it with your plan. In that case, there are number of questions to ask:

Compliance and Legal Matters:

• Is the 401(k) plan compliant with current IRS and DOL regulations?
• Are there any compliance issues, audits, or investigations pending or in the past?
• Have there been any recent plan amendments or changes?
• When was the last time the plan’s document has been restated?
• Have all employee contributions and employer match obligations been made in a timely manner, and are all contributions up to date?
• Has the 2023 Form 5500 been filed?
• Is there any pending litigation against the plan or its Trustees?

Structural Details of the Plan:

• What is the current plan design and structure?
  • Is the plan a Safe Harbor? (If so, what type of formula is used?)
  • Does the company make Profit Sharing contributions? (If so, what type of formula is used?)
  • What is the employee Waiting Period to get into the plan?
  • When are the Entry Dates?
  • Does the company use Auto Enrollment? Automatic Deferral Escalation?
  • Are both Roth and Traditional Contributions allowed?
  • What type of vesting schedule is being used?
  • Does the plan allow for employee loans?
• What recordkeeping platform is being used?
• Who is listed as the Trustee for the plan?
• Who is the third-party administrator for the plan?
• Are there any third-party fiduciaries being used?
  • If yes, what type of fiduciary?
  • Who is serving as a third-party fiduciary?
• It would be suggested to gather a copy of the most recent Form 5500, 408(b)2 Notice, 404(a) Notice, Investment Policy Statement, Plan Document, and Adoption Agreement.

Participant Data:

• It is prudent to collect a consolidated statement detailing the investments offered in the plan and dollar amount invested in each investment along with the number of participants in the plan.
• Have all annual notices been provided to the employees?
• Do you have beneficiary forms on file for each participant?

At CoSource Financial Group, we work closely with you to help ensure a smooth transition for your acquisition. As always, please reach out with any questions that you may have for our team.

Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early. Both qualified retirement plans and IRAs typically involve fees, expenses, and services that should be compared when considering a qualified plan rollover. Past performance is not a guarantee of future results.