A closer look at the pre and post-transaction impacts on NQ plans, participants and financing strategies.
- Determine Change of Control status. Would the transaction be considered a Change of Control under the terms of the plan document and/or under 409A?
- Will the participants experience a “separation from service” as a result? For stock sales, generally there is not a separation from service. For asset sales, a transfer of employment from the seller to the buyer is considered a separation from service from the seller. If separation from service is a distribution event under the seller’s plan, the transfer would then trigger a distribution to the transferring employees (and any other employees that terminate employment with the seller in connection with the transaction). However, a special rule in 409A allows the buyer and seller to agree to invoke the “same desk rule” so that the transaction would not constitute a separation from service for the transferred employees.
- What, if any, actions are required if a Change of Control occurs? Plans often require accelerated vesting and/or accelerated payment (often in a lump sum) if a Change of Control occurs. In order for the Change of Control to trigger payment, the plan’s Change of Control definition has to be one that complies with 409A. Accordingly, making the determination under 1, above, is very important.
- What if the plan does not provide for payment in a lump sum upon a Change of Control and the seller or buyer wish to terminate the plan and cash out participants’ benefits? A special rule under 409A allows the seller or buyer (whomever is responsible for the deferred compensation obligation after the transaction) to elect to terminate the plan and cash out the participant’s benefits if a Change of Control occurs. The action to terminate the plan must be taken within 30 days before or 12 months after the Change in Control. Once the election to terminate and distribute following a Change in Control occurs the balances must be distributed within the next 12 months.
- What documents need to be revisited (plan doc., adoption agreement, etc.) to reflect the change in ownership? Consider 409A requirements when changing any plan terms.
- Are there any tax consequences to consider?
(a) For acquiring entity – appropriate recording of liability and assets will be important.
(b) For employees – a taxable event occurs only if they receive a distribution, except if vesting is accelerated upon the Change of Control, in which case FICA applies on vesting.
- Plan design evaluation – Best Practice Plan Designs? The design options of existing plans are often a function of the objectives originally set forth at implementation. A full understanding of the company’s intentions and expectations going forward for the stakeholders of the plan is required.
With that said, generally the more participant flexibility the better as this creates the best ROI for the sponsor. Features like deferral opportunities on multiple compensation types, multiple in-service accounts, multiple separation from service accounts, access to account information through multiple devices, fund rebalancing and transfer tools are highly valued by participants.
- What if the buyer wants to continue the seller’s plan instead of terminating it? Several options exist to maintain separate plans, to consolidate the plans or to freeze and start a new plan. However, this is highly dependent on the sponsor’s objectives.
• Maintaining separate plans is the easiest document and communication wise but will be difficult administratively. Also, most costly.
• Consolidating may be difficult from an administration and plan drafting perspective if the features, particularly the distribution provisions, are substantially different. This will require the most significant counsel participation as well.
• Freezing the seller’s plan and maintaining the other for consolidated participation is often a preferred option. Design considerations above would be paramount in this decision.
• Freezing both plans and starting a new plan has some advantages as well but results in administrative complexity and communication challenges due to the maintenance of multiple plans.
• A Master Document and Adopting Employers strategy could potentially be useful.
- Rabbi Trust issues? If there is a Rabbi Trust, the trust document needs to be reviewed in general and for any specific provisions such as funding requirements trigged due to the Change of Control.
- Financing considerations? Multiple potential considerations here and an excellent opportunity to audit the cost-effectiveness of legacy funding assets vs. contemporary options. Requires a conversation around current design and go-forward preferences.
- Desired financing positions going forward? Considerations include amounts, percentages, pre/post tax distribution calculations, rebalancing tolerance levels?