SOLUTIONS IN A FLASH- RETIREMENT PLAN CORRECTION SOLUTION:
RETIREMENT PLAN M&AYHEM

By: Ilene H. Ferenczy, Esq.

It’s March 14, 2026. Today, right before the next day’s deadline for salary deferral refunds, Gordon Gecko of Wall Street Investments calls his Third Party Administrator (TPA), Bud Fox, about the data request he received earlier in the year. “Hey, Sport,” said Gordon, “I sold my company last year. We shut down the 401(k) plan and paid everyone out. All the employees went to work for the buyer. So, don’t expect any information or fees from me this year.”

Bud was stunned into silence by this announcement. “H-h-how did you know how much to pay everyone? What documentation did you use to terminate the plan? Did anyone sign distribution forms?” Then he caught his breath and tried to regain some composure. “What kind of business sale was it?”

Gordon said, “I don’t know the details. You know me, Bud. I just pocket the money. We sold the business. Period. Made a bloody fortune. We gave the employees the amount that you showed on their 2024 statements, and I took the rest. I rolled my $2,000,000 to my IRA. So, we don’t need to worry about any administration anymore. Thanks for all your help in the past.”

Bud didn’t know where to begin. He knew that it was unlikely that any mergers and acquisition lawyer involved in the company sale took care of the plan properly. But how could he convince Gordon that he could be accruing penalties for all kinds of things and perhaps even put the tax deferred status of his IRA money at risk? And how was he going to convince Gordon that he needed Bud’s services this year?

M&A Realities

Business purchases and sales (usually called “M&A Transactions,” or “mergers and acquisitions”) seem like they should be outside the purview of retirement plan people. But plans don’t necessarily stop when a business is sold. There are a lot of wind-up activities that need to be done, not the least of which is making sure the plan documents are up to date, that termination documentation is adopted, that any last year administration is done correctly, and that payments are made to participants properly, including getting their signatures on distribution elections.

M&A lawyers are commonly highly respected members of their firms, because company transactions are very complex, and cross over several areas of the law – contract law, tax law, and labor and employment law. And, lawyers who work in this space commonly have practices designed to maneuver around all of these considerations effectively. However, the rules relating to the company’s benefit plans are commonly not the M&A folks’ strong suit, and, as a result, are not given the attention needed….and the problems that arise as a result of not handling the plans correctly can be very expensive to resolve.

It would be nice if the lawyers on both sides of a transaction would take care to bring in ERISA people – or even notify the service providers handling the plan – to ensure proper treatment of the plan. But this happens relatively rarely.

What Could Happen?

Here are some examples of bad things that could happen if the plan issues are not addressed when a company transaction occurs (and trust us, there are more than what we’re showing here):

• The plan’s administration is not done because neither the buyer nor the seller takes responsibility for its close-out;
• Contributions are due and not made, with penalties accruing for the company that was legally responsible;
• If the stock of the company is sold, the plan goes to the buyer automatically. If the buyer also sponsors a plan, special rules apply, and the buyer could have to pay unexpected amounts on behalf of their employees under the plan terms;
• It is common that 401(k), defined benefit, or a cash balance plans are not permitted to make distributions on plan termination unless certain steps are taken. So, just shutting down the plan may not be a good thing;
• The plan can pay the wrong amounts to the participants;
• Administration obligations (such as the filing of final returns) in the last year of the plan may be ignored, causing the buyer or seller to accrue government penalties, taxes, and interest. These penalties can easily run into the hundreds of thousands of dollars.

Remember: a key value of a retirement plan is that the participants don’t pay taxes on their benefit from the plan until it’s distributed. Participants usually want that tax-deferral to continue even after they leave the company, the business is sold, or the plan terminates. Some of the mistakes listed above can cause participants to be taxed immediately.

After all those years of carefully maintaining the plan (and hiring TPAs and others to help), why would the business owner just abandon all diligence at the end? Because he or she probably had no idea what was needed, and likely neither did the M&A team.

What Should Plan Sponsors Do When They Sell Their Business?

The best thing that a selling plan sponsor can do is to get help from a benefits expert that has M&A expertise – commonly a lawyer – while the transaction is happening. If there is concern for keeping the transaction under wraps, the M&A attorney can prepare a nondisclosure agreement for the TPA to sign so they can get involved. That involvement is valuable and should precede the sale closing for two reasons. First, there are things that must be done to protect the plan’s tax-exempt status before the transaction occurs. Some of those options evaporate once the transaction closes. Second, there are several different types of business sales, and the structure of that sale will affect the processes for the plan and the participants. Consultations with a plan expert may both ensure that the seller’s goals for the plan are achieved and also prepare the buyer for any involvement it must have after the transaction closes.

Even if the business owner doesn’t want to hire ERISA counsel, the owner should involve its retirement plan team in the M&A process on a timely basis to make sure that the proper steps are taken to deal with the plan. The seller may think that all responsibility has gone to the buyer once the transaction closes. But, usually, the purchase agreement will require the seller to reimburse the buyer for expenses that occur as a result of steps that the seller should have taken before the transaction. So, this means money out of the seller’s pocket, which won’t be good.

What Does Bud Do Now?

Bud knows that it has always been hard to get Gordon to concentrate on the details, but also knows that there is work to be done. He tells Gordon, who appreciates blunt and tough talk, “You want to avoid paying taxes now on your $2 million in the IRA? You want to avoid IRS and DOL penalties of $150,000 or more? Then we need to make sure that the shutdown of your plan was done correctly. So, I need you to send me the information I’ve asked for and let me do my thing so that you don’t end up in hot water, which could be in the hundreds of thousands of dollars. My fees are chump change compared to your liabilities, Gordon. Don’t be penny wise and pound foolish.”

Bud also takes the opportunity to contact the advisors and lawyers that worked on the M&A transaction to discuss with them the need to deal with the retirement plans. He arranges to go to their office and do a lunch and learn for their M&A team so that any problems that end up arising in the Wall Street Investments situation don’t plague other clients.

Last, Bud makes it a point to talk to his other clients when he has the opportunity about letting him know about M&A transactions before they occur. “I know that you will be excited and busy if you are selling or buying a company. But, trust me, you don’t want the retirement plan to be a pain in your side for years after the transaction because you didn’t do what was needed. So, remember to involve me, the earlier the better.”

Do you have questions relating to M&A transactions of your clients? Call us and talk. After all, we are your ERISA solution. (Also, by the way, Ilene wrote a book on this topic called Employee Benefits in Mergers and Acquisitions. If you are interested in it, go to here to get information.)