Successful Acquisitions Include Thorough Due Diligence

October 11, 2023

For an acquiring organization, due diligence of a target company’s retirement plan may not be at the top of the list of acquisition activities. But a focused review of the retirement plan can help achieve a successful purchase. A thorough due diligence team can identify potential risks and liabilities, compliance issues and other retirement plan issues.

Uncover Liabilities and Issues

Whether the acquisition is a stock or asset transaction, there are many factors to consider related to the retirement plan (qualified and/or nonqualified) associated with the purchase.

In a stock acquisition, the buyer generally assumes legal responsibility and liabilities of the seller’s retirement plan. In asset acquisitions, the seller often retains the legal responsibility and liabilities of the retirement plan, and the plan is subsequently terminated by the seller. However, the disposition of the retirement plan can be negotiated pre-close.

In either case, conducting thorough due diligence of the plan:

  • Determines potential exposure to liabilities that may be present in the retirement plan involved in the acquisition
  • Uncovers hidden issues that could affect the qualified status of the acquired plan, as well as that of any resulting merged plan
  • Allows the acquiring company to determine a plan for post-close harmonization

Benefits of Thorough Due Diligence Prior to an Acquisition

  • Mitigates the risk of potential corrective contributions and/or IRS excise tax penalties post-close
  • Saves the buyer from potential future compliance issues

It’s important to explore the four options available for the retirement plan involved in the acquisition:

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Merge Terminate Spin Off Separate

Buyer interested in having one unified plan with consistent benefits among all employees

Buyer not interested
in assuming liability for seller’s plan and/or maintaining any protected benefits of seller’s plan

Buyer only acquiring
a portion of the seller’s companys

Buyer interested in maintaining separate plans and keeping the current benefit structures of buyer’s and seller’s plans separate

Find Support Through a Due Diligence Report

For employers in the process of an acquisition or merger, USI Consulting Group’s (USICG’s) experienced team of ERISA attorneys, actuaries and consultants provides thorough due diligence to identify potential risks and liabilities, compliance issues and other retirement plan concerns. After a complete review and comparison of the seller’s and buyer’s plans, the team delivers a report that details findings, recommendations and options for the merged plan, giving the organization guidance as they move forward in the process.

Following the completion of the transaction, USICG also helps ensure implementation of the game plan that was set as part of the due diligence plan. This often includes:

USICG’s support during merger and acquisition (M&A) transactions can be key to helping organizations mitigate risk and incremental costs.

Case Study: Due diligence support through acquisition

During its acquisition transaction, a medical technology company based in the Midwest received valuable guidance from USICG. The company’s small human resources team and finance department relied on USICG’s guidance through a challenging transition. Due diligence services provided by our consultants included:

  • Coordinating the launch of new 401(k) and nonqualified deferred compensation plans at accelerated pace to meet aggressive go-live date
  • Conducting a recordkeeper request for proposal and determining the best customized fit
  • Creating a low-cost investment menu*
  • Writing a new 401(k) document with adaptable language to meet the needs of the buyer
  • Providing plan design benchmarking information to ensure the client’s retirement plan would be competitive in the industry

* Investment advice provided to the Plan by USI Advisors, Inc. Under certain arrangements, securities offered to the Plan through USI Securities, Inc. Member FINRA/SIPC. Both USI Advisors, Inc. and USI Securities, Inc. are affiliates of USI Consulting Group.

This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional. | 1023.S0927.0072

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