What happens to a 401(k) in a merger?

Key Takeaways:
  • Understanding whether your deal is an asset or stock sale determines if you inherit the seller’s 401(k) plan and its liabilities.
  • Merging, maintaining, or terminating a 401(k) plan each comes with compliance risks and IRS rules that must be carefully navigated.
  • Early due diligence and the right team of retirement plan specialists can prevent costly mistakes and help with a smooth M&A transition.

 

Mergers and acquisitions come with a flood of strategic questions: Will the deal grow revenue? Can operations be integrated smoothly? Will the leadership team stay intact?

But there’s one area that often gets pushed to the back burner — until it becomes a major liability: the company’s 401(k) plan.

It may seem like a small administrative detail, but a poorly handled retirement plan can disrupt your deal, invite IRS scrutiny or leave you with expensive compliance headaches. Whether you’re buying or selling, understanding how to manage the 401(k) through a transaction is crucial.

Let’s break down what you need to know.

Step One: Understand the Structure of your Deal

Before you touch a single plan document, you need to know what kind of deal you’re working with — asset sale or stock sale. The difference will shape your retirement plan responsibilities.

  • Asset Sale: Picking and Choosing What You Buy

In an asset sale, you’re buying the company’s equipment, inventory, customer lists, maybe even its location — but not the corporate entity itself. That distinction matters.

You’re not automatically assuming any of the seller’s retirement plans or related liabilities. Unless you specifically agree to adopt them, the seller’s 401(k) stays their problem.

Think of it like buying a car without the previous owner’s unpaid speeding tickets. Clean break.

  • Stock Sale: You Get Everything — The Good and the Bad

In a stock sale, you acquire the legal entity — meaning you step into its shoes, and with it, everything it owns and owes. That includes the retirement plan, plan assets, participants and any existing problems.

If the seller’s 401(k) has compliance issues, underfunded accounts or administrative errors, you now own those issues. You can’t afford to overlook them during due diligence.

Step Two: Decide What Happens to the Plan

If your deal is a stock sale, you’ll be taking on the target company’s 401(k) — which brings up your next major decision: what to do with it.

There are three main paths, each with its own pros and cons.

Option A: Keep Both Plans (At Least for Now)

This option is about short-term simplicity. You leave the target company’s plan intact and continue operating both your own and theirs — at least during the IRS-approved transition period.

What to know:

  • The IRS allows separate plan operation through the end of the year following the year of acquisition.
  • It’s a good stopgap while you evaluate your long-term plan strategy.

Downsides:

  • Two plans = double the fees, audits, notices and compliance testing.
  • Plans must eventually be tested together for nondiscrimination, which can be a nightmare if each plan has its own third-party administrator (TPA).

Bottom line:
It buys you time, but it’s not a long-term solution.

Option B: Merge the Plans

This is often the most practical path forward. The target company’s 401(k) gets merged into your existing plan, and all employee accounts are transferred over.

Benefits:

  • Simpler administration.
  • Easier compliance testing.
  • Stronger negotiating power on plan fees.

But be careful:
You can’t just roll everything over and call it done. Some plan features — known as “protected benefits” — must be preserved. These might include:

  • Unique vesting schedules
  • Early retirement provisions
  • Loan or hardship rules

Also, the plan being merged (the “disappearing” plan) is still subject to IRS audit for up to three years from the final Form 5500 filing. So, keep detailed records — and make sure the plan is compliant before merging.

Option C: Terminate the Target’s Plan

The cleanest sounding solution — shut it down and enroll everyone into your plan — is trickier than it appears.

Why? The IRS “Successor Plan Rule.”

This rule says that if you terminate a 401(k) plan, you can’t offer a new plan (or even add people to your current one) for 12 months, unless the two companies are still technically separate employers.

If the IRS sees your two companies as already merged into one “controlled group,” you’ll be barred from terminating the plan and rehiring employees into your existing 401(k) for at least a year.

Timing is everything:
If you want to go this route, terminate the plan before the merger is complete — not after. And even then, get a qualified opinion to make sure the IRS won’t consider you a single employer too soon.

Step Three: Don’t Skip Due Diligence

Here’s where many business owners get burned. You’d never buy a building without checking the foundation — and you shouldn’t buy a company without reviewing its retirement plan either.

Your 401(k) due diligence checklist should include:

  • Plan documents and amendments
  • Historical Form 5500 filings
  • Results of compliance testing
  • Participant loan and hardship records
  • Plan audit reports
  • Any past IRS or DOL correspondence

If the company has a defined benefit (pension) plan — tread carefully. These plans can carry huge, hidden liabilities.

Red flags to watch for:

  • Failed nondiscrimination or top-heavy tests
  • Missed employer contributions
  • Outdated or noncompliant plan provisions
  • Operational errors or late deposits

Even if the seller says “our plan is in great shape,” get it reviewed by a specialist. A plan with even minor compliance issues can take months (and thousands of dollars) to clean up.

Step Four: Assemble the Right Team

M&A deals involve lawyers, bankers, accountants and consultants — but make sure someone on your team is watching the retirement plan.

Your M&A attorney may not be focused on the 401(k). You need an ERISA attorney or a retirement plan specialist who can:

  • Interpret plan language
  • Spot compliance concerns
  • Recommend the right post-deal strategy

Also bring in a CPA or plan advisor who understands plan design and tax implications.

Don’t wait until after the deal is signed to think about this. Decisions made too late can limit your options — or trigger compliance violations.

Final Thoughts: Plan Now, Avoid Regret Later

Retirement plans won’t be the flashiest part of your merger or acquisition. But they might be the most dangerous if ignored.

M&A activity can be exciting — it’s about growth, opportunity and the future. But just like buying a home, the fine print matters. And the 401(k) is part of that fine print that can cost you big if mishandled.

Make the retirement plan a standard part of your M&A checklist. Get your advisors’ eyes on it early, and understand your options before choosing a path. You’ll be better prepared to make smart, confident decisions — and avoid unnecessary risk.

Need help navigating a 401(k) during your M&A deal? Contact an Adams Brown Wealth Consultant to help guide you through it.