CLOSING THE DEAL IRONING OUT PENSION PLAN ISSUES DURING A MERGER OR ACQUISITION.

• Author: REICH, GAIL SURLIN

MERGERS AND ACQUISITIONS represent a favorite growth strategy for many CPA firms. The consolidations and economies of scale that characterize today's business mentality are finding their way into the accounting profession's vision of full-service firms for the new century.

If your firm is contemplating an acquisition or merger, be aware that these transactions involve many employee benefit issues which, if not attended to up-front, can either ruin a deal or create untold problems after the deal is complete. When two firms merge, they need to decide whether to terminate one of the firm's benefit plans, merge two plans into one or become a successor employer/sponsor to an existing plan. Many of the unexpected and expensive complications surrounding employee benefit issues during a merger or acquisition can easily be avoided with proper planning and preventative measures.

PLAN QUALIFICATION

In most mergers or acquisitions, each firm will have one or more pension and profit sharing plans that are intended to be qualified under IRC Sec. 401(a). If any of the plans that were thought to be qualified have a defect, drastic tax consequences can follow. For example, a plan could be disqualified if:

* the form of a document does not comply with extensive IRC requirements;

* the plan is not administered according to its terms; or

* the plan favors highly compensated employees with respect to coverage, contributions or benefits.

Smaller firms often maintain their plans without proper oversight by benefit professionals, and it is not uncommon to find myriad qualification issues and legal problems lurking in the plan documentation or in the manner in which the plan is operated. Any one of these failures could trigger a host of problems, such as: employees could become immediately subject to taxation on benefits not yet received, the firm could lose its tax deduction for contributions, or the trust could become subject to tax on its investment income.

Once a firm acquires a problematic plan, it stands to suffer all of these consequences, many of which are magnified if the plan is merged into another plan. Identifying such defects at the outset of a merger allows the responsible party to take appropriate action before the transaction is complete, or for the firms to account for the expense of correction when they formulate the agreement terms.

401(K) PLANS

The 401(k) is the most common plan maintained today. An issue unique to 401(k) plans is the fiduciary's duty with regard to the designated investment options that are available to plan participants. ERISA requires a certain level of fiduciary responsibility from the plan sponsor to select investment alternatives and monitor performance. These standards, however, are not always met. A firm acquiring or merging with another firm whose plan is not in compliance subjects itself to a lawsuit by a disgruntled...