401(k)s: The Overlooked Element in M&A Transactions

When business owners acquire or merge with another company, the headlines focus on valuation, synergies, and closing timelines. But quietly sitting in the background, often unnoticed until it’s too late, are legacy benefit plans, control group structures, and compliance traps that can derail your deal.

Retirement plans are consistently one of the most commonly overlooked elements in M&A transactions specifically, how control group and affiliated service group rules can create unexpected liability, compliance issues, and contribution obligations unless proactively addressed before the transaction closes.

Why Retirement Plans Must Be on the M&A Due Diligence List

“We work with successful business owners who acquire companies to grow, but they rarely think about how that impacts their existing retirement plan design.”

Buying or merging with another company may trigger IRS rules around control groups or affiliated service groups (ASGs). When that happens, your new business structure may require that all employees across both entities be tested together, and possibly receive contributions under your existing retirement plan.

If the acquired business has its own plan, things become even more complicated. There may be testing failures, required plan mergers, and transition rules to follow.

Understanding Control Groups in M&A

A control group exists when:

  • You own 100% of your current business
  • You acquire at least 80% of another business

These businesses are now considered one entity for retirement plan purposes, even if you operate them separately.

What it means:

  • Employees in both companies must be included in nondiscrimination testing
  • You may have to offer benefits to newly acquired employees
  • If your current plan was designed for a lean staff, your contribution structure may need to change

Affiliated Service Groups: Less Ownership, Same Risks

An Affiliated Service Group doesn’t require 80% ownership. These groups are formed when:

  • Two businesses work closely together to provide services
  • Owners have overlapping management or operational control
  • There’s a financial or service-based dependency between the entities

This can create a testing and compliance requirement even when the acquiring company owns less than 80% of the other.

Why Timing Matters

“We designed your plan for the life you had when we started, your structure, your staff, your ownership. If that changes, the plan needs to change too. But once you close the deal, your options become limited.”

Amendments can’t be retroactive. If the new company structure results in a failed nondiscrimination test, you may be required to fund employee contributions you hadn’t budgeted for. That’s why retirement plan review should happen before the transaction closes, not after.

M&A Compliance Checklist for Business Owners

Below is a checklist of what to review during any merger or acquisition:

Corporate and Operational Structure

  • Ownership percentages post-transaction
  • Whether common ownership triggers a Control Group or ASG
  • Number of employees and employee classifications

Retirement Plan Considerations

  • Whether the acquired company has an active plan
  • Plan document availability and filing history (Form 5500)
  • Testing compatibility and transition rules
  • Whether a plan merger is advisable or necessary

Insurance and Risk Transfer

  • Review or add Directors & Officers (D&O) coverage
  • Errors & Omissions (E&O) policy alignment
  • General liability, workers’ compensation, and commercial auto review

Employee Benefits

  • Group health plan compatibility
  • COBRA compliance transition
  • Ancillary benefit obligations

Professionals You Should Notify (and Involve Early)

Too often, business owners loop in advisors after the deal closes. That’s too late for plan design. Here’s who should be at the table before the transaction is finalized:

  • ERISA Attorney – for plan document review, compliance, and amendment timing
  • Third Party Administrator (TPA) – for testing, filings, and plan design updates
  • CPA – for tax implications of employer contributions and deduction strategy
  • Wealth Advisor – to align plan changes with long-term retirement strategy
  • Business Transaction Attorney – for deal structure, reps, and warranties related to benefit plans
  • HR/Benefits Team or Consultant – for post-close onboarding and communication

Retirement Plans Aren’t a Footnote

If you’re acquiring or merging businesses and haven’t reviewed your retirement plan design, you’re missing a key element of due diligence. The IRS and DOL won’t give you a grace period because you were unaware.

Get ahead of it. Confirm whether control group or ASG rules apply. Test before you transact. Adjust your plan before it’s too late.