Typically, the purchase agreement does not specifically call out how the 401(k) plans should be handled. This diagram assumes the purchase agreement is silent about the 401(k).
Asset sale
After an asset sale, the buyer purchased employees and equipment from
Company B, but the sale typically does not include the 401(k) plan unless
the agreement provided otherwise.
The “target” company generally continues to exist and continues to sponsor its original 401(k) plan. Owner B will need to determine what to do with the 401(k). If owner B no longer earns income from Company B, the owner might consider terminating the plan; service with company B generally does not count for Company A’s plan (this assumes Company B is not legally related to Company A after the purchase and that Company B’s plan has no special service rules for former employees of Company B).
Decision maker for Company B plan = Owner B
Stock sale
Immediately prior to a stock purchase, the target company may want to consider terminating its 401(k) plan.
After a stock sale, the buyer purchased all assets and liabilities of the
target/selling company, including 401(k) plans that were not terminated
before the sale. The “target” company is now owned by the buyer.
The buyer may want to consider merging the 401(k) plans together but should carefully consider how benefits will change, what to communicate to employees and timing. Service with Company B will generally count for Company A’s plan. There is a transition rule under Code section 410(b)(6) that provides special rules for mergers and acquisitions.
Decision maker for Company B plan = Owner A
