What Does a Company Merger Mean For My 401(k)?

While being laid off is a potential—and worrying—side effect of a merger, a change in position, title, salary, and benefits could also eventuate. Here's how.

While a merger may seem like the worst outcome for you, it could actually prove to benefit you greatly.

 

In the event that your current place of employment is bought out by another company, it’s likely you (the employee) will have little say in the matter. However, when it comes to merging two businesses, it’s often the employees who feel the biggest impact of this type of shift. Here, we look at different types of mergers and how a merger might affect your benefits, such as your 401(k) account.

Types of Mergers

If you’re able to learn what type of sale took place, this may give you a better idea about how your benefits may be affected.

Asset Sale

This type of activity is really how it sounds—a company sells off certain assets, such as a physical building, a lease, inventory, or a client list. In return, the buyer takes on certain liabilities (e.g., a mortgage payment).

Stock Purchase

This is considered a more streamlined approach. A stock purchase involves a buyer obtaining a seller’s majority share of stocks, resulting in the buyer owning the business as a majority shareholder. The buyer obtains all assets and liabilities. If the buyer is not interested in acquiring certain assets or liabilities, then they are sold or taken care of before the sale.

Three Ways Your Benefits May Be Affected

The sale type will typically impact the future of your benefits.

If an Asset Sale Has Taken Place…

After an asset sale, it’s likely that your original employer will maintain control over your 401(k) plan. It is rare for companies that acquire a business through an asset sale to make any changes to the 401(k) plan. If you already had a 401(k) plan in place, it’s likely that your accounts will be maintained and will continue to be managed as they were before.

If a Stock Purchase Has Taken Place…

In this scenario, your original employer will no longer have control over the company, including the benefits offered. There are three possible outcomes:

• Your plan may be terminated. 
• Your plan may continue uninterrupted.
• Your plan may be merged.

#1: Your Plan May Be Terminated

If your new employer decides to terminate the original 401(k) plan, this could mean one of two things. Either the account is closed and the funds are distributed to you, or funds are not distributed and the account remains open, but you are not permitted to make any more contributions to the account.

If the funds are distributed to you, it is your responsibility to roll the amount over into a new account, such as a traditional IRA, within 60 days or face a penalty from the IRS if you are under 59½ years old.¹  

It’s important to note that in the event that the plan is terminated following a merger, you will not lose vesting benefits. The plan must be 100% fully vested, regardless of the original vesting schedule laid out by the employer.²

#2: Your Plan May Continue Uninterrupted

In some cases, the buyer may decide to keep the 401(k) plan intact. If this is the case, it’s likely you’ll be able to continue contributing to your 401(k) plan with no changes needed at your end.

#3: Your Plan May Be Merged

Your new employer may decide to merge your original company’s 401(k) plan with theirs, creating a hybrid of sorts. If this is the case, it’s likely that the human resources (HR) department will not begin developing a new 401(k) plan until after the final sale is completed. This could mean waiting weeks or months for a new plan to be put in place, and you may be locked out of your account during the transition period. 

Once a plan has been chosen by your employer, you may be given a new set of investment options to choose from or your funds may be automatically placed into a scheme that is similar to your previous one.

A business merger can be stressful for employees—no one knows if their job is safe or how their job may change. However, understanding how your 401(k) plan may be affected can help you adequately prepare for what may be coming down the line. If you’re still unsure about how a merger may affect your retirement savings, feel free to contact our team, California Retirement Advisors, at cradvisors.com to speak with a licensed advisor. They will help you to stay focused on any potential next steps to take when it comes to protecting your retirement savings.

By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors