Merger Affects 401k

When companies talk merger, the impact on each of the entity’s 401(k) plans is usually a low priority item that gets little consideration.  However, if you are a participant in a plan of a company that is being merged, you may find that:

• Your ability to contribute to the plan or borrow from it may
• be temporarily frozen.
• Your plan could be terminated and merged with other company’s plan
• Loans may have to be repaid, or they may not be allowed to be transferred to the new plan, forcing you to treat it as a distribution subject to tax and penalty.
• When you join the new plan, your service for the old employer may be counted for vesting purposes with respect to employer matching contribution.
• The new entity may not count your prior service so that you may have to work 5 years before there is full vesting or new employer matching contributions.
• Matching formulas are less favorable than under the old plan because the purpose of the business combination is to reduce costs.

Since your 401 (k) plan could be frozen as long as six months as a result of the business combination, pension plan participants should consider making defensive asset allocations as soon as they become aware that merger discussions have been initiated. This should provide some protection against a downturn in the stock market and prevent paper losses from becoming real. It’s also advisable to consult your professional retirement and tax planning advisor to review your situation and evaluate protective strategies.