Monday morning began with a call from Ella, the HR director at a mid-sized manufacturing firm.
“David, we’re about to finalize a merger with a smaller company; we’ve been in talks with them for months. The CEO asked me to pull together a checklist of post-integration tasks—including merging their 401(k) plan into ours.”
I paused. “You’re not going to merge their plan into yours after the deal closes, are you?”
“Well, yes,” she said. “We want minimal disruption for the employees, and we’re keeping most of their staff. Their retirement plan will get folded into ours as soon as the ink is dry.”
“Ella,” I said gently, “I hope I can persuade you to slow that part down.”
“Why?”
“Because once you merge their plan into yours, any problems with it will become your problems. If they have compliance issues, you’re about to inherit them—along with the expenses and liabilities.”
“Thanks, David, but it’s a small company. They’ve had some financial challenges and they’re grateful we’re stepping in. Why do you think their plan could be out of compliance?”
“It’s common for companies in distress to cut corners. They might have skipped safe harbor contributions, missed salary deferral deposits, or neglected annual filings. And mistakes like these are made all the time by healthy, financially secure companies. If anything is out of line and you merge their plan into yours, you now have problems with your plan.”
She went quiet. “Hmm. We just assumed everything was in order.”
“I highly recommend we do a compliance review before the deal is signed,” I said. “This gives you leverage. If problems show up, you can build them into the acquisition deal terms. Let them fix anything they screwed up at their expense, whether they hire someone to straighten things out or give you a discount on the acquisition price. Once the deal is signed, your options shrink fast.”
Ella nodded. “I’ll talk to our CEO. Can you do the review this week?”
“Let’s make it happen,” I said.
By the next morning, Ella looped us in with the CFO and legal team. We found several compliance issues: missed contributions, late filings, and a safe harbor failure from two years ago. And because we caught those problems before the deal closed, they were able to negotiate the cost of remediation into the purchase price—and keep the merger on track.