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A Planning Guide for Plan Sponsors Mergers and Acquisitions Planning Guide Defined Contribution Plans insure Retirement invest Strategies retire Contents 1 Eight Steps to Successful Mergers and Acquisitions 4 Implementation Process Summary 5 Frequently Asked Questions 5 General Questions 16 Transition Questions 18 Due Diligence Checklist 26 Plan Information Comparison Charts 28 Mergers & Acquisitions Planning Guide Summary 32 Guidelines for Plan v. Settlor Expenses Notice: The material in this guide is the exclusive property of MassMutual and is provided for informational purposes. It is not intended for general distribution, nor should it be construed as legal, tax, or investment advice. This information is not a substitute for legal, tax, or investment advice from a competent lawyer, tax or investment adviser. Any reproduction of this guide, in whole or in part, without the prior written consent of MassMutual is strictly prohibited. Eight Steps to Successful Mergers and Acquisitions Step 1...Involving Your Tax/Legal Counsel Company mergers and acquisitions are extremely complex matters. In the midst of such activities, considerations of retirement plan design and structure can naturally give way to issues of corporate management and direction. Involving your tax and/or legal counsel at the earliest possible stage of the process will help ensure that all issues and considerations are handled at the right time and in the proper manner. You should also notify your MassMutual Retirement Services associate as early as possible so we may orchestrate a high quality service strategy throughout the process and provide a smooth transition for you and your plan s participants. The detachable due diligence checklist at the back of this guide is helpful in gathering the necessary information about an acquisition target s plan. Provide your tax and/or legal counsel with the checklist prior to meeting with an acquisition target to discuss the plan merger, spin-off or consolidation. Step 2...Data Gathering By using the detachable checklist at the back of this guide throughout the due diligence process, you will obtain valuable information to aid you in determining: identity of all of an acquisition target s plans; compatibility of an acquisition target s plan benefit structure with your current plan benefit structure; the transaction s impact on nondiscrimination requirements; costs associated with assuming an acquisition target s plan liabilities, continuing an acquisition target s plan as a separate plan or terminating an acquisition target s plan; whether an acquisition target s plan is a single employer, multiple employer or multiemployer plan; and corporate structure issues (controlled group, governmental employer, etc.). Your MassMutual Retirement Services associate is available to assist you in gathering the data needed to make an informed decision and affect a smooth transition. Step 3...Choosing the Best Option Once you gather the data, you must analyze it and choose the appropriate course of action for your situation. This guide is designed to alert you to many of the issues arising throughout the plan merger, spin-off and consolidation processes and identify available options. It does not recommend any particular option. Once again, you are encouraged to involve your tax and/or legal counsel in this process as early as possible. Step 4...Administrative Coordination Plan mergers, spin-offs and consolidations require extensive administrative coordination. Filings with governmental agencies, plan amendments and participant communications are just some of the areas requiring attention. MassMutual will work with you and your advisors throughout the entire process. We offer regulatory filing assistance, prepare communications materials and work with the prior recordkeeper to identify any protected benefits issues and to ensure a smooth and accurate transfer of participant records. We also provide signature-ready amendments for your MassMutual contract and/or MassMutual prototype or volume submitter plan document as necessary. While MassMutual cannot make the determination for you as to whether an expense is a settlor 1 expense payable by the employer or an expense that can be paid from plan assets, we can provide you with material to help you make that determination. Refer to the Exhibit titled Guidelines for Plan v. Settlor Expenses at the end of this guide. Step 5...Plan and Contract Documents Based upon the information provided, MassMutual will generate amendments ready for review with your advisors. For example, if an acquisition target will join your company s plan, but continue to maintain its company name and Employer Identification Number (EIN), MassMutual will provide you with an amendment to the MassMutual prototype or volume submitter plan document including the new company as a participating company under your existing plan. Similarly, if an acquisition target will no longer exist as a separate entity following the merger, we can provide an amendment to your MassMutual prototype or volume submitter plan document to address years of service with the acquisition target for eligibility and vesting and, if applicable, benefit accrual. MassMutual may need corporate transaction documents prior to completing an amendment. Additionally, MassMutual will provide consulting services and prepare other amendments as necessary to suit the needs of your particular situation. Step 6...Participant Communications/ Enrollment Meetings Participant Communications Plan mergers, spin-offs and consolidations all require timely communications that clearly summarize the new plan or plan changes taking place to help participants understand the options available to them under the new plan and any changes that might have occurred as a result of the merger, spin-off or consolidation. Such changes may include changes in vesting, the way service is credited or changes/enhancements to the contribution formula. Participants in your plan and an acquisition target s plan will have many questions and concerns about the status of their benefits. They will also need to be notified about the timing and duration of the blackout period during which an acquisition target s plan assets and participant records will be moved to MassMutual. By addressing these issues promptly, you will avoid confusion, alleviate concerns and maintain a higher level of comfort and productivity among all employees. MassMutual can assist you in designing, publicizing and delivering your participant communications. We offer an extensive variety of participant communication pieces to assist you in keeping participants informed throughout the plan transition. For example, payroll stuffers and plan information sheets are available and can be customized to your plan specifics. Our MassMutual Retirement Services associates are available to help enhance participant awareness and understanding of your defined contribution plan. 2 Enrollment Meetings Plan mergers, spin-offs and consolidations all require the enrollment or re-enrollment of at least some participants in the final plan. Enrollment meetings help participants understand the investment options available to them under the new plan and any changes that might have occurred as a result of the merger, spin-off or consolidation. Such changes may include mapping of investment selections, changes in vesting or changes in company matching contributions. MassMutual can assist you in designing, publicizing and delivering your enrollment meetings. Our field offices are staffed with communications specialists dedicated to helping you maximize participation in your plan and answering your and your employees questions. Step 7...Transfer of Assets The acquisition target s plan assets are transferred to MassMutual after all contract and plan documents are completed and signed and any required government filings are timely completed. MassMutual can assist you in completing any Form 5310-A (Notice of Plan Merger or Consolidation, Spin-off, or Transfer of Plan Assets or Liabilities) that you may be required to file with the IRS along with a user fee within a required timeframe. You have two options for transferring assets: 2. Cash Conversion Liquidate all assets to cash as of the date MassMutual takes over recordkeeping and investment services for your plan. The assets are held in a money market or guaranteed interest investment option until participant records are received and reconciled. Then, the assets and earnings are allocated to participant accounts based on their new investment selections. This method is less common due, in part, to fiduciary concerns that participants accounts will not be invested according to participants elections during the transition. Note: The Pension Protection Act of 2006 provides fiduciary protection to sponsors where investments are mapped to like investment options during a blackout period provided certain conditions are met. Step 8...Wrap-Up Once you have completed steps 1 through 7, it is important to wrap-up the merger/spin-off process. This involves a review of the steps already taken and an evaluation of any remaining tasks to be completed (including time frames) such as Form 5500 filings and testing considerations. Your MassMutual team will be there every step of the way to answer your questions and help guide you through this complex process. To learn more about how we can help orchestrate your plan transition, call your MassMutual Retirement Services associate. 1. Mapping Conversion Transfer plan assets to MassMutual investment options similar to those available through the existing investment provider. This is the standard method because it keeps participants fully invested throughout the transition process. 3 Implementation Process Summary Step 1 You notify tax/legal counsel and MassMutual of potential merger, consolidation or spin-off. Step 2 MassMutual helps you gather plan data on the acquisition target plan and begin your due diligence. Step 3 MassMutual assists you in determining plan asset liquidity to help you select the best option. Step 4 MassMutual begins coordinating administrative details and identifies any protected benefit issues. Step 5 MassMutual prepares plan and contract amendments (as necessary) for execution. Step 6 MassMutual assists in communicating changes to participants and enrolling (re-enrolling) participants in the final plan. Step 7 MassMutual coordinates the final transfer of assets and records to the final plan. You may need to file with the IRS any required Form 5310-A (with user fee) within the required time period. Step 8 MassMutual reviews the entire process with you to assure its completion and your satisfaction. 4 Frequently Asked Questions General Questions 1. If my company sponsors a qualified plan and we acquire another company that also sponsors a qualified plan, what options do we have regarding those plans? You may: 1. merge the two plans into one new plan; 2. maintain the two plans separately and make continued contributions, as necessary, to both plans on an ongoing basis; 3. freeze one of the plans and add the participants of the frozen plan to the other plan on a future basis; or 4. terminate one of the plans and add the participants of that plan to the other plan on a future basis, allowing the terminated plan s participants to roll over their terminated plan account balances to the ongoing plan. Note: Termination of the plan can occur before or after the corporate acquisition. 2. How do I know which option to choose? First, you should consider at what point you are in the process (e.g., has the acquisition occurred or are you still in the negotiation phase). Then, analyze your plan(s) and the acquisition target s plan(s) for compatibility, similarities, differences and tax qualification issues. Next, consider whether there are any business reasons for maintaining multiple plans (i.e., different types of businesses, or businesses located in different areas requiring different benefit structures). Finally, decide what provisions will be required/desired in the final plan. Note: If this is a stock acquisition or merger, the acquiring company (or resulting corporation) is deemed to automatically step into the shoes of the target company. This means the acquiring company will automatically acquire the target company s plan assets and liabilities unless arrangements are made for the acquisition target to terminate its plan prior to the acquisition or merger. If this is an asset acquisition, the acquiring company does not acquire the acquisition target s plan assets and liabilities unless there is agreement by the parties. Also, you should consider the impact of any action on employee relations and morale. After dealing with anti-cutback issues and protected benefits, there are still the concerns and expectations of participants in both plans to consider. These options are discussed in more detail in additional sections of this guide. 3. Can a governmental plan or a tax-exempt plan be involved in a plan merger? Yes, plans of governmental employers and tax-exempt employers can be involved in a plan merger. 5 4. Can multiemployer plans be involved in a plan merger or spin-off? Yes. However, a multiemployer plan is not subject to the same rules that apply to a single employer plan. Refer to IRC 414(l). For example, if some (but not all) participants in a single employer plan become participants in a multiemployer plan under an agreement in which the multiemployer plan assumes all the liabilities of the single employer plan with respect to these participants and in which some or all of the assets of the single employer plan are transferred to the multiemployer plan, 414(l) applies, but only with respect to the participants in the single employer plan who did not transfer to the multiemployer plan. Note: This guide is not designed to address governmental plans or multiemployer plans. Governmental plans are not subject to IRS Code 411, so requirements related to vesting service and 204(h) notices do not apply to governmental plans. 6. What exactly is a plan merger? A plan merger is the combining of two or more plans into a new plan or into an existing plan of the ongoing company. If the assets of each plan are not combined, but are instead kept separate for purposes of determining benefits, the plans are not considered to have merged. Mergers are typically the most common option chosen by plan sponsors. Thus, this guide deals more with issues surrounding mergers than alternative options. 7. What is the difference between merging plans and converting a plan? Mergers involve combining two or more plans into one. Conversion involves one plan changing into another type of plan (i.e., money purchase into a 401(k) plan). 5. Is controlled group status a factor in a merger, spinoff or consolidation? Yes. An acquisition target s organizational form can have a significant impact on the acquisition process. In a stock purchase acquisition, you are purchasing the form of the entity and thus, its form may impact the plan. Since the acquired entity will continue to have a corporate identity, a subsidiary type situation will be created raising controlled group issues. As the purchasing company, you will become the sponsor of any plan(s) maintained by the acquisition target and responsible for any current or future liabilities of such plan(s). 6 8. What if I am only buying a part of a company? Would I be responsible for prior service and benefits? In the sale of a piece of Company A to Company B, Company A has two basic choices: 1. Keep the assets in Company A s plan; or 2. Transfer the assets to Company B. If the assets remain under Company A's plan, a partial plan termination is deemed to have occurred and the affected participants must become fully vested in their benefits under Company A s plan. 9. Does the other plan have to be the same type as my company s plan? No. Many different types of qualified plans can be merged together. In merging two plans, you must decide what type of plan the successor plan will be (e.g., money purchase or profit sharing) and amend the plans accordingly. There are special regulatory requirements for a merger of a money purchase plan with a profit sharing plan. 10. Can a defined contribution plan be merged with a defined benefit plan? Generally, yes. However, one of the plans should be converted to the other type of plan (e.g., a defined benefit plan can be converted to a defined contribution plan) and then when the two plans are the same type (e.g., both defined contribution plans) they can be merged. After conversion, the merger follows the rules governing the surviving plan type. Note: Merging a defined benefit plan into a defined contribution plan can result in significant complexities with respect to plan provisions and plan administration. Most plan sponsors find it much less complicated to simply freeze or terminate the defined benefit plan and allow future benefits to accrue under the defined contribution plan. 11. Is the merger effective date important? Establishing the merger effective date is much more complicated than it may first appear to be. Aside from attempting to determine the date upon which two plans being merged become a single plan under the law, the regulations state that the actual date of a merger or spin-off shall be determined on the basis of that situation s facts and circumstances. For purposes of this determination, the following factors (none of which is necessarily controlling) are relevant: 1. date on which affected employees stop accruing benefits under one plan and begin coverage and benefit accruals under another plan; 2. date the amount of assets to be eventually transferred is calculated; and 3. if the merger or spin-off agreement provides that interest is to accrue from a certain date to the date of actual transfer, the date from which such interest shall accrue. 7 12. What conditions need to be met when two or more defined contribution plans are merged? IRC 414(l) will be satisfied if all the following conditions are met: 1. The sum of the account balances in each plan equals the fair market value (determined as of the date of the merger) of the entire plan assets; 2. The assets of each plan are combined to form the assets of the plan as merged; and 3. Immediately after the merger, each participant in the plan as merged has an account balance equal to the sum of the account balances the participant had in the plans immediately prior to merger. 13. What is a spin-off? A spin-off occurs when one plan is split into two or more plans. A spin-off may be relevant in the acquisition context when an acquiring company is only purchasing a portion of the selling company (e.g., a subsidiary or division). In that situation, the selling company can spin-off a portion of the plan it sponsors covering only those employees in the subsidiary or division being sold. This new plan can then be adopted and maintained by the acquiring company or merged into the acquiring company s plan. 14. What requirements must be satisfied when a defined contribution plan spin-off occurs? IRC 414(l) will be satisfied if, after the spin-off occurs, the following requirements are met: 1. The sum of the account balances for each of the participants in the resulting plans equals the account balance of the participant in the plan before the spinoff and 2. The assets in each of the plans immediately after the spinoff equals the sum of the account balances for all participants in that plan. 15. Will I need to amend my company s plan? Yes. The particular circumstances of each spin-off, conversion or merger will determine the level and complexity of the amendments required. A complete review of each plan is necessary to determine the extent of the amendment. Although only a partial list, it is necessary to consider the impact of the transaction on th
