In the rush of activity surrounding a corporate acquisition, it’s easy to see how certain priorities fall by the wayside. Negotiating deal terms, reviewing financials, and managing communications often take center stage. Yet one area that deserves more attention is the 401(k) retirement plan.
For employers on either side of a transaction, the 401(k) is more than just an employee benefit; it carries fiduciary obligations, compliance responsibilities, and administrative implications that can influence the transaction’s success and employee experience. When both buyer and seller sponsor defined contribution plans, the decisions around those plans can have lasting consequences. As consultants to plan sponsors, our role is to help employers navigate these choices with a focus on compliance, operational efficiency, and protecting participant outcomes.
The 401(k) as a Strategic Consideration
The state of a seller’s 401(k) plan can reveal much about the organization’s operations and potential hidden liabilities. Plans with poor documentation or unresolved compliance issues can create administrative burdens and potential liabilities for the buyer.
Evaluating the plan early—ideally as part of pre-closing due diligence—helps identify red flags before they become integration hurdles. A proactive review creates space to shape a strategy aligned with fiduciary obligations, reducing the likelihood of reactive decisions that increase risk or limit future options. And because retirement plans are often deeply intertwined with workforce management and culture, early review also supports a smoother employee transition.
Navigating Plan Design During an Acquisition
There are generally three options for handling the seller’s plan: terminate it, merge it into the buyer’s plan, or continue operating both plans independently (perhaps temporarily).
Terminating the seller’s plan is possible when timing allows, but, in most cases, the termination amendment must be signed before the closing date to make the transition as smooth as possible for participants. In addition, terminating a plan can be problematic if the seller has limited staff remaining to complete the lengthy process. If the plan termination is initiated after the acquisition, successor plan rules may apply, which can delay employee eligibility for the buyer’s plan and restrict plan design options. With either timing, plan termination takes a lot of work and allows participants to take distributions, creating the potential for unwanted plan leakage.
Conventional wisdom discourages plan mergers due to the risk of inheriting compliance issues from the seller’s plan. However, in our experience, with proper due diligence, they can be an effective way to minimize employee disruption. Employers should examine plan governance, confirm compliance, review recent audits and operations, and consider whether any protected benefits need to be preserved. Plan mergers work best when the seller’s employees join the buyer’s payroll and begin participating in the buyer’s plan at the time of acquisition, with balances transferring afterward based on the recordkeeper’s schedule.
The third option—maintaining both plans during a transition period—is common. The IRS allows a transition window through the end of the following plan year, during which the plans do not have to pass coverage testing under Internal Revenue Code Section 410(b), as long as no significant changes to plan coverage occur and both plans passed coverage pre-acquisition. This flexibility buys time to make a thoughtful decision but may constrain some plan changes during the interim. For example, it may limit the ability to make immediate design or eligibility adjustments that otherwise might improve the participant experience.
Structural Factors that Influence Plan Decisions
Whether the deal is structured as a stock or asset purchase significantly shapes retirement plan strategy.
In a stock purchase, the buyer assumes the company and its retirement plan. Employees typically stay in their same jobs, triggering the IRS’s “same desk” rule—meaning employees are not considered to have terminated employment and cannot take distributions from the 401(k) unless they experience another qualifying event, such as turning age 59½. For plan sponsors aiming to preserve retirement savings and avoid distribution leakage, this continuity is generally a good outcome.
In an asset purchase, by contrast, the buyer acquires selected business units without necessarily taking the seller’s retirement plan. Employees are typically considered terminated from the seller and rehired by the buyer, enabling them to take distributions or roll funds into the new plan. While this flexibility can be attractive to some participants, it also introduces administrative complexity and increases the risk of participants cashing out, especially if decisions or actions are required of them during the transition.
Additional Operational Considerations
Payroll integration is often a decisive factor in plan strategy. Feeding employee data from the seller’s payroll system to the buyer’s recordkeeper can be cumbersome. If acquired employees are moving to the buyer’s payroll right away, enrolling them in the buyer’s plan may be the most efficient path. Otherwise, companies may need to maintain manual or stopgap systems, or keep employees temporarily on the seller’s payroll and enrolled in their current plan on the existing recordkeeping platform.
Outstanding participant loans also require close attention. If loan continuity isn’t properly maintained, participants may be forced to repay their balances in full or incur a taxable distribution. Although the IRS permits certain types of loan rollovers, these transactions are nuanced and can easily go wrong without experienced oversight.
Preserving the Participant Experience
Participants naturally have questions when their employer changes, and a lack of clear information can erode trust. Transparent, timely communication about plan changes, deferral continuation, and loan treatment helps preserve confidence and engagement.
Defined contribution plans are too important—and too interconnected with the deal and workforce—to be treated as a post-close afterthought. Employers who approach these decisions thoughtfully and with the right expertise can avoid missteps, protect participant interests, and support a successful acquisition outcome.