Mergers and Acquisitions Planning Guide

Transcription

1 A Planning Guide for Plan Sponsors Mergers and Acquisitions Planning Guide Defined Contribution Plans insure Retirement invest Strategies retire

2 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.

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 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 the following plan provisions: Eligibility Will the eligibility requirements be more restrictive under the merged plan than under the premerger plans? Vesting Will the merged plan have a different vesting schedule than one of the pre-merger plans? 8

11 Optional Forms of Benefits and Accrued Benefits The merged defined contribution plan may eliminate optional forms of benefits, including the Qualified Joint and Survivor Annuity (QJSA) option, with respect to benefits that have accrued at the time of the merger under the pre-merger plans provided both plans are non-pension (e.g., profit sharing) plans and the plan offers a single-sum distribution option immediately after the amendment that is available on identical terms as the eliminated options (e.g., same eligibility, same commencement date, etc.). If a money purchase pension plan merges into a profit sharing plan, the QJSA option may not be eliminated for benefits accrued under the money purchase plan, but the merged plan can eliminate any other optional forms of benefits that were offered under the money purchase plan, provided that Optional forms of benefits, including the QJSA option, may be eliminated with respect to benefits that accrue after the merger if the surviving defined contribution plan is a non-pension (e.g., profit sharing) plan. Distribution Commencement Date Early Retirement Date is a protected benefit for benefits that have already accrued. It can only be changed for benefits that accrue under the merged plan prospectively. 16. Do the features of a money purchase plan have to be protected if it is merged into a profit sharing plan? Yes. If the surviving plan is a profit sharing plan, a money purchase pension plan plan that merges with the profit sharing plan must retain its features (such as withdrawal restrictions) with regard to benefits that accrued under the money purchase plan. 1. the participant under the money purchase plan is fully informed and makes a voluntary election to transfer his or her entire money purchase plan accrued benefit to the profit sharing plan, and 2. the merged plan offers a single-sum distribution option on identical terms as the eliminated options. 9

12 17. What other benefits under a defined contribution plan are not protected benefits? The following are examples of items that are not 411(d)(6) protected benefits: ancillary life insurance protection; the availability of loans; the right to make after-tax employee contributions or elective deferrals to a 401(k) plan, a SEP plan, a tax sheltered annuity or a Simple 401(k) plan; the right to direct investments; the right to a particular form of investment; the allocation dates for contributions, forfeitures, and earnings, the time for making contributions (but not the conditions for receiving an allocation of contributions or forfeitures for a plan year after such conditions have been satisfied), and the valuation dates for account balances; administrative procedures for distributing benefits, such as provisions relating to the particular dates on which notices are given and by which elections must be made; and rights that derive from administrative and operational provisions, such as mechanical procedures for allocating investment experience among accounts in defined contribution plans. 18. Should the final plan specifically address the prior plan s transferred assets? Yes, the final plan in a merger or spin-off must contain specific language to prevent cutbacks of accrued benefits from the prior plan. The final plan must also contain language to preserve the original defined benefit plan s protected benefits. 19. What vesting issues should plan sponsors be aware of? In a merger or spin-off the IRC 411 vesting provisions require the following: 1. A participant s vested accrued benefit (e.g., account balance) after the amendment/merger must not be less than the participant s vested accrued benefit prior to the amendment/merger. 2. If a participant has at least three years of service, and the new vesting schedule would provide a lesser vesting percentage at any time in the future, the participant must be given a 60-day election period to choose between the old vesting schedule and the new vesting schedule. The schedule each participant chooses would depend on each participant's personal situation and future increases in vesting are determined under the applicable schedule chosen by each participant. 3. Beginning with the 2007 plan year, all employer contributions to defined contribution plans must vest under a schedule that is no longer than a 3-year cliff or 6-year graded vesting schedule (that already applied to employer matching contributions). Special rules apply to collectively bargained plans. 10

13 20. Is there a way to avoid the 411(d)(6) protected benefit rule requirements? You may elect to have the acquisition target terminate its plan prior to the transaction effective date and then permit voluntary rollover of the participants benefits into your plan as rollover contributions. If the acquisition target s plan is terminated, the affected participants accrued benefits (e.g., account balances) become 100% vested. Then, each participant must be given an opportunity to receive his or her benefit as a distribution or to roll all or a portion of the benefit into your plan as a rollover contribution. Rollover contributions lose their prior plan characteristics coincident with the prior plan s termination and are not subject to prior plan restrictions or protected benefit rules. Former participants in the terminated plan, however, may choose to roll over their distributions to IRAs or keep the cash, which would result in fewer assets in the merged plan. 21. How do I credit service for participants from an acquisition target? In determining whether you are required to credit service, you must consider whether the acquisition is the result of an asset or a stock sale. As a general rule, if the acquisition results from a stock sale, then the acquiring company is required to credit a participant s service with the acquired company after the acquisition. You should check with your ERISA counsel, however, if you are acquiring stock of a subsidiary company since an exception to the general rule may apply. If the acquisition results from an asset sale, as a general rule, the acquiring company is treated as a new employer and is not required to credit a participant s service with the acquired company after the acquisition. However, as a practical matter, the acquiring employer generally will recognize service for purposes of eligibility and vesting. An exception to this general rule may apply if the buyer assumes sponsorship of the seller's plan or a portion thereof, and if the buyer accepts a direct transfer of assets and liabilities (other than by direct rollover) from the seller's plan into a plan maintained by the buyer. If you continue to maintain the plan of the acquisition target or merge it with your existing plan, you must credit a participant s service with the acquisition target company as service for your company for plan purposes. You may also choose to credit service with an acquisition target company, even if that company did not maintain a qualified retirement plan. 22. What is the Same Desk Rule and how does it impact a merger, spin-off or termination? Under the Same Desk Rule, the IRS applies a different definition to the term separation from service than it does to severance from employment. The employee does not incur a separation from service when he or she continues in the same or similar job capacity with a different employer as a result of a dissolution, merger, acquisition or similar transactions of the former employer. This means that, even though the participant has terminated employment with the former employer, a participant subject to the Same Desk Rule has not separated from service for purposes of receiving a plan distribution from the former employer s plan if the new employer is unrelated to the seller, has accepted a transfer of plan assets from the prior employer s plan and has taken over all or part of the prior employer s plan. Therefore, the participant would not be entitled to a distribution from the plan until he or she has a severance from employment with the new employer and/or meets the criteria for a distribution under the plan. 11

14 With the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 401(k) plans may be amended to provide distributions upon severance from employment regardless of whether the severance from employment occurred (see IRS Notice ). Review your specific circumstances with your tax or legal counsel to determine where your plan fits and what amendments (if any) are necessary. 23. What determines if there has been a partial plan termination in a spin-off or merger? Generally, a spin-off will not result in a partial termination if the spun-off plan remains in existence where the participants in the spun-off plan will continue to receive service credit for vesting and eligibility purposes. This is also the case when the spun-off plan is to be sponsored by an acquiring company since the acquiring company is obligated to credit service with the prior employer. A partial termination may arise if two plans covering a substantially similar group of employees merge and the final plan eliminates benefit accruals provided by one of the premerger plans. In such a situation, it is advisable to file IRS Form 5300 and/or Form 5310 to have the IRS determine the status of the plan following the merger and whether a partial plan termination has occurred. 24. What happens if there has been a partial plan termination? When a partial plan termination occurs, all affected participants become fully vested in their accrued benefits as of the date of the partial plan termination. Affected participants are those who have been eliminated from participation and/or ongoing benefit accrual. Other participants who are not affected would continue to be subject to the plan s vesting schedule. 25. What are the testing implications of a plan merger or spin-off? Nondiscrimination and coverage tests are impacted by plan mergers and spin-offs involving plans of unrelated companies. The addition (or deletion) of participants in the highly and/or non-highly compensated groups will affect the nondiscrimination and minimum coverage ratio percentages. Note: If a company acquires a plan as part of a corporate level transaction, then the plan can be maintained and tested separately for minimum coverage purposes for the plan year in which the transaction occurs and the following plan year. If the two plans remain separate, they can be tested separately for nondiscrimination purposes during the transition period. This permits the ongoing plan sponsor to evaluate the plans to determine whether to amend, merge or terminate the plan without bearing the burden of failed testing issues while doing so. It is important that you know exactly when the transition period begins and ends as this defines the window and will allow you to avoid consequential mistakes. 12

15 26. Are any IRS or other government filings required if we merge, consolidate or spin-off a plan? Different filings may be necessary or recommended depending on the course of action chosen. If the merger or spin-off results in a change to one or both of the affected plans, it is recommended that the plan sponsor seek a determination letter from the IRS. Additionally, you may need to file IRS Form 5310-A (Notice of Plan Merger or Consolidation, Spin-off, or Transfer of Plan Assets or Liabilities). You will not need to file IRS Form 5310-A if you maintain a qualified defined contribution plan and merge it with another qualified defined contribution plan, assuming all of the following conditions are met: 1. The sum of the account balances in each plan prior to the merger (including unallocated forfeitures, an unallocated suspense account for excess annual additions and an unallocated suspense account for an ESOP) equals the fair market value 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 has an account balance equal to the sum of the account balances the participant had in the plans immediately prior to the merger. You will not need to file IRS Form 5310-A if you maintain a qualified defined contribution plan and spin-off the plan into two or more qualified defined contribution plans, assuming all of the following conditions are met: 1. The sum of the account balances in the plan prior to the spin-off equals the fair market value of the entire plan assets; 2. The sum of the account balances for each of the participants in the resulting plan(s) equals the account balances of the participants in the plan before the spin-off; and 3. The assets in each plan immediately after the spin-off equals the sum of the account balances for all participants in that plan. Other exceptions apply to mergers of defined benefit plans and plan spin-offs. Refer to the Filings section of the Mergers & Acquisitions Planning Guide Summary at the end of this guide for further details on filings pertaining to your particular circumstance. 27. What effect might catch-up contributions have on my plan merger, consolidation or spin-off? If an employer acquires a plan (outside of its controlled group) through merger or acquisition and offers catch-up contributions to its existing eligible individuals, the newly acquired plan should not need to offer catch-up contributions to its eligible individuals until the end of the transition period beginning on the date of the transition and ending on the last day of the first plan year beginning after the date of change. If a plan sponsor has both a union and a non-union plan, the union plan should not have to offer the catch-up provision until the first plan year beginning after the current collective bargaining agreement has ended. 13

16 28. Can a tax sheltered annuity ( 403(b) ) plan or governmental deferred compensation ( 457(b) ) plan be merged into a qualified plan? No. However, distributions from a 403(b) plan or a 457(b) plan may be rolled over to a qualified plan if the qualified plan permits such rollovers. 29. What is a 204(h) notice? Section 204(h) of ERISA generally requires that participants in money purchase plans (not applicable to profit sharing plans) be notified of any amendment that significantly reduces the rate of future benefit accruals ( 204(h) notice ), including amendments that terminate and/or freeze benefits under the plan. A plan amendment that eliminates or significantly reduces any early retirement benefit or retirement-type subsidy shall also be treated as having the effect of significantly reducing the rate of future benefit accrual. An amendment affects the rate of future benefit accrual if it can reasonably be expected to change the amount allocated in the future to the participants accounts. A 204(h) notice must be written in a manner calculated to be understood by the average plan participant and shall provide sufficient information (determined by the IRS) to allow applicable individuals to understand the effect of the plan amendment. The IRS may also allow an exemption or simplified form of notice for plans with fewer than 100 participants. Final regulations provide general standards for content of 204(h) notices rather than specific language requirements: If the required narrative description will not reasonably convey the approximate magnitude of the reduction in benefit accruals, additional narrative or one or more illustrative examples are required to be included in the notice. If an amendment affects different classes of participants differently, separate 204(h) notices must be provided to each class of participants. When an amendment may result in reductions that vary in impact, the notice, with certain exceptions, must show the approximate range of reductions. If an amendment reduces an early retirement benefit or retirement-type subsidy merely as a result of reducing the rate of future benefit accrual, notice need not contain a separate description of the reduction in the early retirement benefit or retirement-type subsidy. A cessation of accruals simply requires a description of the old contribution formula, a statement that no future benefits accrue, and the effective date of the amendment. 14

17 30. Who should receive a 204(h) notice? The 204(h) notice must be provided to: each participant that is affected by the amendment as well as any beneficiary so affected; each alternate payee (designated by a QDRO) under the plan that is affected by the amendment; any employee organization representing participants entitled to the notice; and each employer who has an obligation to contribute under a multiemployer plan. 31. When and how must a 204(h) notice be given? IRS final regulations require that a 204(h) notice generally must be provided at least 45 days before the effective date of the plan amendment: 1. The period is reduced to 15 days before the effective date of an amendment adopted in connection with a business merger or acquisition, regardless of the size of the plan, and with respect to amendments of small plans; 2. Business merger or acquisition amendments involving a plan-to-plan transfer or merger and affecting only an early retirement benefit or retirement-type subsidy (but not reducing the rate of future benefit accrual) are provided an additional special timing rule requiring notice be provided no later than 30 days after the effective date of the amendment. Notice may be delivered using electronic means as long as the method used results in actual receipt or the plan administrator takes appropriate and necessary measures to ensure actual receipt. Special rules apply to plan termination situations. The Department of Labor has advised the IRS that the 204(h) notice will generally satisfy ERISA s requirement for summaries of material modifications. Generally, an excise tax of $100 per day per failure may be imposed. There is a cap available on the excise tax of $500,000 for failure to comply with these rules, if reasonable diligence was exercised to meet the notice requirements. Additionally, there is excise tax relief available for certain failures corrected within 30 days. 15

18 Transition Questions 1. What is meant by investment mapping and cash conversion? When plans merge, assets invested with the prior service provider typically need to be reinvested in the investment options available under the final plan. Investment mapping refers to one of the methods available for reinvesting the transferred plan assets. Under this method, each investment option available from the prior investment provider is matched up with a corresponding investment option available from MassMutual under your plan. Plan assets are moved from the prior provider investment options to the corresponding MassMutual investment options on the day following your service start date (the date MassMutual assumes recordkeeping responsibilities for the acquisition target plan). By mapping the acquisition target s investment options directly into your MassMutual investment options, participants can remain fully invested in the market throughout the transition process. The second method for reinvesting transferred assets is referred to as a cash conversion, in which the acquisition target investment balances are liquidated to cash as of the date MassMutual takes over recordkeeping and investment services. 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 the participants new investment selections. 2. How will participants know what is happening to their transferred balances? MassMutual can provide you with a customized participant communication brochure designed to introduce your plan s investment options and explain how existing account balances will be transferred. The brochure can also inform participants of key dates in the conversion process (including any blackout period that may occur) and provide information on options they may want to consider prior to (or after) that period. 3. What is a transition or blackout period? Merger activity typically involves either the consolidation or splitting apart of plan assets. To accomplish this, service providers and plan sponsors usually need a transition period to reconcile participant account balances, build new accounts or prepare a final accounting before transferring assets to a new provider. Generally, during at least a portion of this transition period, participants are unable to transact on their account balance, which is called the blackout period. Blackout periods can range from overnight to several weeks depending on a variety of factors including, the complexity of the transition, the quality of the data provided by (and to) the service providers and the number of participant accounts involved. 16

19 4. Does the transition period affect our plan s IRC 404(c) compliance? The Pension Protection Act provided guidance, effective beginning with the 2008 plan year for participant directed plans, that sponsors may receive fiduciary relief under ERISA section 404(c) during the blackout period where the sponsor maps participant accounts from one investment to another. Such relief is available provided the following conditions are met: 1. At least 30 days but no more than 60 days prior to the investment mapping, the sponsor provides written notice of the change in investments that compares the existing and new investments and a description of the default investments absent on participant elections; 2. The participant or beneficiary has not provided contrary investment selections prior to the effective date of the change; 3. Participants exercised independent control over their allocations prior to the change in investments. In order to receive the fiduciary protection, the investments after the change must be similar in risk and return characteristics to the options prior to the change. 5. What happens to existing loan balances? If the acquisition target plan has a loan provision, outstanding loan balances will be sent to MassMutual with the records and plan assets. We will work with your payroll vendor to ensure that loan repayments for these carryover loans are sent to MassMutual for processing. Until plan assets are moved to MassMutual, the acquisition target should follow their current procedures to process loan repayments under their current plan. 6. If an acquisition target s service start date and their payroll date are the first of the month, should I send the amounts deducted on that date to MassMutual for the final plan, or to the acquisition target s current recordkeeper? If the payroll date falls on or after the service start date, 401(k) deductions should be submitted to MassMutual. Since MassMutual is assuming recordkeeping responsibilities as of the first of the month, the acquisition target s current recordkeeper would not process any activity after the last day of the prior month. 17

20 Due Diligence Checklist Review this checklist prior to meeting with an acquisition target. 1. Identify type of defined contribution plan (select each box that applies): profit sharing plan 401(k) plan money purchase pension plan stock bonus plan employee stock ownership plan other If you are considering merging an acquisition target s plan(s) into or with your plan, there are many issues to consider involving the plan type. For example, all money purchase plans provide certain 411(d)(6) protected benefits which might not be offered under a 401(k) plan, such as a joint and survivor annuity option. As a protected benefit under 411(d)(6), the money purchase plan s annuity option cannot be reduced or eliminated in the merger with respect to currently accrued benefits. Thus, this would be a consideration in reviewing the compatibility of the plans before deciding on a course of action. Your MassMutual team can assist you in reviewing plans for protected benefits issues in plan mergers. 2. Identify form of plan document: standardized prototype non-standardized prototype volume submitter individually designed Standardized plans require that the plan sponsor include all eligible employees including those in controlled groups. However, with respect to certain minimum coverage and nondiscrimination requirements, you may maintain separate plans for the participants of an acquisition target plan, regardless of the form of plan document, during a transition period and not include the target plan participants in the minimum coverage and nondiscrimination tests. This period begins on the date of the corporate transaction and ends on the last day of the first plan year that begins after the date of the transaction. Before this time period has expired, the ongoing plan sponsor will need to determine what to do with the acquired plan: a) Merge the plan with their current plan; b) Maintain separate plans while meeting certain minimum coverage and nondiscrimination requirements; c) Terminate the acquired plan; or d) File for Qualified Separate Line of Business (QSLOB) determination for the business unit maintaining the acquired plan. 3. Identify form of plan sponsor (select each box that applies): Corporation Professional Service Corporation S Corporation Partnership, including LLP Limited Liability Company taxed as: a partnership or sole proprietorship a Corporation an S Corporation 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 18

21 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). In an asset acquisition, the plan would remain with the acquisition target (selling) company unless specifically included as one of the purchased assets. Since you purchase only the assets of the other entity, and not its form, the form of an acquisition target may not matter in an asset acquisition so long as the plans are compatible for the planned action (merger, consolidation or termination). Other reasons to identify an acquisition target s organizational form include SEC registration issues and the simplest reason of all to know from whom you re purchasing the plan. 4. Obtain the following documentation for each defined contribution plan: Each piece of documentation requested holds valuable information necessary for determining whether to have the acquisition target s plan terminated before the acquisition, maintained as a separate plan or merged into your company s plan after the acquisition. As the ongoing plan sponsor, you need to know that an acquisition target has been operating its plan as it is legally required to do. Much of this documentation will assist you in verifying that an acquisition target s plan is in compliance with ERISA requirements. An acquisition target s plan administrator will have the bulk of the information needed. As the acquisition process progresses, additional information will be required from an acquisition target s plan recordkeeper. This will involve more administrative detail, such as participant records, account balances, etc. While some of this material is also obtainable through other sources (e.g., Form 5500 information) the availability of such information from the acquisition target s plan administrator and recordkeeper can be a helpful indicator of how carefully they have previously maintained the plan. plan documents trust document, (if applicable) group annuity contract or other funding vehicle all amendments to such documents collective bargaining agreement (if applicable) These documents are necessary to determine the compatibility of an acquisition target s current plan provisions with your company s plan and to uncover existing contractual obligations, if any, impacting the transfer of an acquisition target s plan assets to MassMutual. It is important to obtain the most recent copies that are signed and dated. Determine whether plan documents have been restated or amended within the required regulatory timeframes and confirm that restatements were submitted to the IRS within the required filing periods. These documents detail the benefit structure of the acquisition target s plan and help to satisfy you, as the plan sponsor, regarding qualification issues of an acquisition target. Your MassMutual team will review these documents for such things as protected benefit issues in plan merger situations. Group annuity contracts have many design variables and/or restrictions that should be identified and analyzed (e.g., surrender charges or market value adjustments). Most recent Summary Plan Description (SPD) and all applicable Summaries of Material Modifications (SMMs) Verifies what information has been related to an acquisition target s plan participants with regard to such things as benefits and plan administration. Where a plan document and SPD are 19

22 in conflict, there is also a risk that a court will treat the SPD as the governing document because it contains the information that has been communicated to participants. Form 5500 annual return/reports for the three most recent plan years, including accompanying schedules and audited financial statements (if required) Provides you with asset information about an acquisition target s plan and the number of participants that will be added to your plan. MassMutual utilizes this information to prepare for the addition of those participant accounts to your plan and/or contract. Form 5500s from the three most recent plan years can be useful indicators of plan growth. Small plans can claim a waiver of the audited financial statements if certain conditions are met. To determine whether a small plan s Form 5500 should include audited financial statements, review Schedule I to see if a waiver was taken for a given plan year. Evidence that Summary Annual Reports (or SARs) have been timely distributed Another check for ERISA compliance on the part of an acquisition target. Third-party administrator contracts, if any May reveal limitations or obligations impacting the transfer of plan and participant records to MassMutual. They will also reveal the services that were provided previously so you can determine which services you want provided when the plan transitions to MassMutual. Furthermore, third party administrator contracts serve as a check to be sure all required testing was being performed. Year-end administration report for the three most recent plan years (including top heavy & nondiscrimination testing) Provides the data needed to assure compliance with all required testing (e.g., top-heavy and nondiscrimination). Most recent determination letter and prototype plan opinion letter or volume submitter advisory letter Helps to ensure an acquisition target s plan is qualified, thus avoiding the potential consequences of mixing nonqualified assets with your plan s qualified plan assets. See Section V below. Collective Bargaining Agreement (where applicable) Additional benefit increases and/or restrictions that are not yet effective may be outlined in a collective bargaining agreement. Benefit increases could, for example, impact the amount of future plan contributions. Nondiscrimination Test Results minimum coverage and nondiscrimination While the Form 5500 will report minimum coverage test results, they may be up to three plan years old. Ask for the most current plan year s test results. Refer to Section 8 for more details. Other participant communications that describe a material term of the plan not contained in plan documents, SPD or SMMs A catch-all category to cover anything else that may have been delivered to participants. As with SPDs and SMMs, this may be important if it contains information inconsistent with the plan document. This does not mean that you must uncover every participant communication ever sent to an acquisition 20

23 target s participants. (Note that the request is limited to a very narrow category of communications that describe a material term of the plan that is not otherwise found in the plan document, the SPD or SMMs.) Related Board of Directors Resolutions Requires only those resolutions affecting the defined contribution plan such as delegation of authority to the plan administrator to amend the plan. See section VI below. Form S-8 filings (for plans with company stock) Required filings to comply with SEC registration requirements where a plan permits investment of employee contributions in company stock. Communications received from or filed with any governmental entity or authority Will reveal information such as whether the plan has engaged in any prohibited transactions, is or has been under IRS audit or has been questioned by the Department of Labor (DOL) on the timing of contributions. A description of any outstanding (or threatened) litigation involving the plan Standard due diligence requirement. The potential impact on the plan sponsor and/or the plan assets must be assessed as part of your fiduciary responsibilities to your current plan s participants. 5. Determination letter due diligence: Identify date of most recent determination letter. Note: Determination letters are not required for prototype plans and volume submitter documents that stay within the confines of such documents. Although not required, determination letters help show that plan documents have been reviewed by the IRS and, if a recent determination letter has been received, the plan is up to date with legally required language. Confirm most recent determination letter includes all required plan amendments. First, check the date of all amendments to the plan and/or adoption agreement against the date of the determination letter. This indicates whether any amendments were made effective or executed after the date of the determination letter and are thus, not covered by the determination letter. Second, check within the body of the determination letter to see what statutes the letter complies with. This will indicate whether or not the determination letter is up to date with the most recent legislation. If the plan is a volume submitter plan or prototype plan, confirm that there is a volume submitter advisory letter or prototype plan opinion letter (volume submitter plans and non-standardized prototype plans may have both an opinion/advisory letter and a determination letter). A plan must be qualified by the IRS for the company and the participants to receive tax advantages. IRS plan qualification review may take several months (and in some cases, several years to receive). 21

24 To ease this burden on defined contribution plan sponsors, MassMutual offers prototype or volume submitter plan documents. These plan documents are reviewed by the IRS for pre-approval. After determining that a prototype or volume submitter plan meets IRS qualified plan requirements, a favorable advisory letter is issued approving the prototype or volume submitter plan in its generic form for use by MassMutual clients. Clients use the prototype or volume submitter plan as a template to build their own plans, then the client may decide to send their newly built plan to the IRS along with a copy of the favorable advisory letter (i.e. the letters MassMutual or other document providers received from the IRS pre-approving the prototype or volume submitter document). The IRS responds more quickly to prototype or volume submitter plan qualification requests because they have already pre-approved most of the plan s language and are now simply verifying the client specific language in the prototype or volume submitter document. Normally, the IRS will then issue a favorable determination letter for the client s plan. Generally, filing for a determination letter is not required in order to enjoy tax advantages that a qualified plan can offer; however, it is beneficial to have IRS approval of the specific provisions of your plan document. If an acquisition target s plan is a prototype or volume submitter plan, you should confirm that the prototype or volume submitter plan has received a favorable opinion/advisory letter from the IRS. Then, if the plan is on a non-standardized prototype or volume submitter document, you should check to see if the plan has received a favorable determination letter. 6. Plan documentation due diligence: Confirm that the terms of the plan documents properly reflect the plan s administrative practice. ERISA requires that all plan documents and amendments be formally adopted by authorizing board resolutions or by some entity (e.g., the plan administrator) designated to exercise such authority on behalf of the board. In the latter case, you should collect a certified copy of the board authorization delegating amendment authority to that entity. The plan and all amendments must be fully and timely executed (signed, dated and witnessed by all necessary parties) to have full and proper legal effect. Plan document due diligence ensures an acquisition target has complied with these requirements. Confirm that the plan document and all amendments are fully executed. If an amendment reduced benefit accruals, obtain a copy of the 204(h) notice. To satisfy ERISA 204(h), the timing of the notice can be critical. If the notice which reduces the rate of future benefit accruals (or other IRC 411(d)(g) protected benefit) is not adopted within the required timeframe, significant penalties may be assessed. Confirm that the entity executing the plan document and all amendments was properly authorized by Board resolutions. Confirm that the plan document or most recent amendment complies with requirements of recent legislative changes. This check will reveal whether or not the plan is in conformance with recent changes in the law. In a merger situation, the plan(s) being terminated must be amended for recent regulatory changes prior to termination. 22

25 If plan is a prototype or volume submitter plan, confirm that no amendment has been adopted outside the prototype or volume submitter plan format. As noted, prototype and volume submitter plans are approved by the IRS and contain a variety of pre-approved plan provisions. Clients select from those pre-approved plan provisions and establish their own plan by executing an adoption agreement or plan document. Any change in the pre-approved wording can cause the plan to lose its prototype or volume submitter status. Thus, any amendment not within the pre-approved wording is deemed to be adopted outside of the prototype or volume submitter plan format. This causes the plan to be deemed individually designed, rendering the opinion letter relied on for plan qualification obsolete (assuming there is no subsequent determination letter for the plan as amended). If you find such an amendment during your plan documentation due diligence, you should consult your tax/legal counsel immediately to determine the potential impact of the amendment on the qualified status of the acquisition target s plan. 7. Form 5500 Due Diligence: Confirm the use of the appropriate Form 5500 based on plan size. Qualified retirement plans with 100 or more participants at the beginning of the plan year generally need to file a full Form 5500 along with audited financial statements prepared by an independent qualified public accountant. Small plans (less than 100 participants) are permitted to file Form 5500 with a simplified financial schedules attached and generally without an independent qualified public accountant s opinion. Small plans do not have to complete the schedule C or Schedule G. A small plan may claim a waiver of the Form 5500 annual audited financial statement examination requirement if certain conditions are met, including that at least 95% of plan assets are considered qualifying (e.g, held by certain regulated financial institutions, including insurance companies) or, any person who handles non-qualifying plan assets is bonded in accordance with fidelity bond rules. Confirm Form 5500 was timely filed. Timely Filed means filed by the last day of the 7th month after the plan year ends (assuming no extensions). By filing Form 5558, plan sponsors can obtain an automatic month extension on the 5500 filing deadline. If the fiscal year is the same as the plan year and the employer has filed for an extension for its corporate tax return, then the 5500 has an automatic extension up to this date. For certain multiemployer money purchase plans, review Schedule MB (multiemployer) actuarial information. Should be reviewed in connection with multiemployer money purchase plans that are currently amortizing a funding waiver. Review Form 5500 for disclosure of any noncompliance. Form 5500 contains a series of Yes/No questions concerning various transactions made during the plan year. Yes answers indicate failure to comply with regulations or involvement with prohibited transactions that may have resulted in additional penalties and/or payment of excise taxes. 23

26 8. Confirm the target plan's compliance with the following: (Virtually all of this information should be available from an acquisition target s plan administrator.) IRC 401(a)(4) Nondiscriminatory Contribution Allocations Nondiscriminatory contribution allocations, benefits rights and features for non-401(k), 401(m) plans such as moneypurchase and profit-sharing plans (not applicable if the only contributions to the plan are 401(k) elective deferrals, matching contributions or after-tax contributions). Review the plan for a uniform contribution allocation formula. If the uniform allocation is not satisfied, obtain documentation of compliance with general test for nondiscrimination (rate group). IRC 401(a)(9) Required Minimum Distributions at Age Obtain a list of plan participant ages and confirm compliance that distributions have been made in accordance with statutory and plan requirements at the time of distribution. IRC 401(a)(17) Maximum Compensation Limit (as indexed) Look for this limit to be expressed in the plan document (perhaps by incorporating IRC 401(a)(17) by reference). For 401(k) Plans, ADP and ACP Tests Rather than repeating the actual tests, seek documentation that confirms compliance with these tests, such as copies of the test results. For 401(k) plans, IRC 402(g) Maximum Limit on Elective Deferrals Obtain a list of elective deferrals and assure that they are all under the applicable limit for their given calendar year. IRC 404 Deduction Limit for Defined Contribution Plans Assure deductions have not been made above the appropriate limit for the applicable fiscal year. IRC 410(b) Minimum Coverage Verify compliance through obtaining copies of test results. IRC 415 Maximum Contribution Limit Verify compliance through obtaining copies of test results. This limit is the lesser of 100% of compensation or the indexed amount. IRC 416 Top Heavy Requirements Confirm provision in the acquisition target s plan for top-heavy minimum contribution and vesting rules. Further confirm (if plan is/was top-heavy) that the plan is/was operated in accordance with top-heavy provisions by copies of test results. 72(p)/ERISA 408(b)(1) Participant Loan Requirements Obtain a copy of the plan s loan trust agreement (if not included as part of the plan document) and loan procedures. 9. Litigation Review: Request copies of all relevant documents with respect to any outstanding litigation (or threats of such litigation) other than routine claims for benefits. 24

27 Any litigation (or threat of litigation) other than routine claims for benefits should be thoroughly researched in your litigation review. Copies of any documents relevant to the litigation should be obtained and reviewed for impact (or potential impact) on the plan, plan assets and/or the plan participants. An example of such litigation is litigation related to a plan sponsor delaying contributions and, as a result, contributions are not invested in a timely manner and participants sue. If you assume the plan or engage in a stock acquisition, you will assume the liabilities of that plan unless you negotiate this point with the prior plan sponsor before the acquisition. 10. Plan Investments: Review plan investments to determine whether any investments are illiquid, not well diversified, not readily marketable, or related to the plan sponsor or any of its affiliates. By checking with an acquisition target s investment manager, and obtaining copies of the sponsor s investment policy statement or any due diligence in monitoring investment performance, you should be able to determine if the plan s investments are financially sound, well-diversified and readily marketable. You should also identify any investments in assets related to the plan sponsor or any of its affiliates. This information is necessary for compliance with ERISA 407 and other applicable provisions governing investment of plan assets in employer securities. Keep in mind that the plan s investment policy was the policy of the former plan sponsor and may not be appropriate after it has been acquired. This may especially be true if the acquiring entity bought only a piece of another company. If the plan includes company stock and participant contributions are invested in company stock or participants can direct investments into company stock, confirm a current Form S-8 is on file with the SEC. If plan investments are participant-directed, review plan s compliance with ERISA 404(c). If the plan includes company stock, the Sarbanes Oxley Act prohibits any director or executive officer, as defined in the SEC insider trading regulations, from directly or indirectly trading employer stock during a blackout period. For these purposes, a blackout period is defined as a period of more than three consecutive business days in which at least 50% of the plan participants and beneficiaries under all defined contribution plans of the employer are prevented from trading company stock in their plan accounts. Issuers of company stock must provide to directors and executive officers, as well as the SEC, timely notice (no later than five business days after receiving the required DOL notice from the plan administrator) of a blackout period that triggers the insider trading restriction. If the plan participants are subject to a blackout period during the transition period from one plan to another, confirm that any required notices to directors, executive officers and the SEC were provided within the required timeframe. 25

28 Plan Information Comparison Chart Part I For an initial compatibility analysis, complete the blank copy of this form. Plan Name: ABC Company, Inc. 401(k) Plan Company Structure: Controlled Group of Corporations who all participate in the plan. (ABC, Inc.; XYZ, Inc.; ABCDEFG, Inc.; QRSTUV, Inc. Plan Effective Date: July 1, 1990 (amended June 1, 2002) State: Massachusetts Plan Year: January 1 to December 31 Limitation Year: January 1 to December 3 Coverage: This Plan covers all eligible employees, except employees covered under the terms of a collective bargaining agreement and nonresident aliens with no U.S. income from the Employer. Plan Name: Company Structure: Plan Effective Date: State: Plan Year:, (amended, ) Limitation Year: to Coverage: Eligibility: Age 18 Service 1 4 Year Eligibility: Age Service Service: Credited on the basis of actual hours worked. Plan Entry Date(s): Jan. 1, Apr. 1, July 1, or Oct. 1 Compensation: W-2 (Box 1 on IRS form) comp.; elective deferrals to this Plan or any other plan will be included for purposes of making contributions and ADP/ACP testing. is limited to compensation earned while a Participant in the Plan. Contributions: Employees 401(k) Up to 15% of a Participant s compensation. Participants may begin making or change the amount of Deferred Salary Contributions on the first day of each month of the Plan Year. Service: Plan Entry Date(s): Compensation: Contributions: Company Match 0% to 100% of the first 6% of a Participant s Deferred Salary Contributions. Deferred Salary Contributions over 6% will not be matched. The actual percentage is deter-mined by the Company prior to the end of the plan year. Qualified Non-Elective Employer Contribution Fully vested contributions when made. An additional discretionary contribution allocated to each non-highly Compensated Employee eligible to participate in proportion to his/her compensation as a percentage of the compensation of all eligible employees. Rollovers Permitted from prior qualified plans and may be made prior to meeting the eligibility requirements for participation in the plan. Transfers Permitted from prior qualified plans and may be made prior to meeting the eligibility requirements for participation in the plan. 26

29 Plan Information Comparison Chart Part II For an initial compatibility analysis, complete the blank copy of this form. Investment Selection: Participant over all contributions. Investments: Guaranteed Interest Option, Balanced Option, Core Equity Option, Small Cap Equity Option, Total Return Option, New Horizons Option, and Ultra Option. Investment Frequency: Participants can change investment selection of future contributions daily. They can transfer money between investments daily via FLASHSM line, The JourneySM, or a transfer form, at no charge. The investment options selected and investment frequency comply with ERISA 404(c). Life Insurance Policies: Life insurance is not available under this Plan. Vesting: Years of Service Vested Percentage: 1 20% 2 40% 3 60% 4 80% 5 or more 100% Forfeitures: Applied to reduce the Employer s contribution for the Plan Year. In-Service Withdrawals: Investment Selection: Investments: Investment Frequency: Life Insurance Policies: Life insurance is/is not this Plan.(circle one) available under this Plan. Vesting: Years of Service Vested Percentage Forfeitures: In-Service Withdrawals: Company Match/Profit Sharing Contributions The vested portion of the Participant s Account cannot be withdrawn for financial hardship before the Participant has completed five Years of Service or on or after attaining age Employee 401(k) Contributions Contributions (but not earnings) can be withdrawn for financial hardship. Contributions and all earnings can be withdrawn on or after attaining age Loans: 2 outstanding loans allowed (including loans for over 5 years to purchase a home) via FLASH SM line, The Journey SM, or a loan request form. The loan interest rate will be prime + 1%. Repayment of principal and interest repaid to Participant s segregated account. Loan fee is deducted from the Participant s Account. (Annual administrative charge is paid by the Company.) Extra Termination Options: One-Sum Cash Payment. Retirement: Early Age 55 and 5 years of service Normal Age 65 Disability the first day of any calendar month, determined based on the Company s normal personnel practice. Reemployed Participant: Any distribution received upon termination of employment must be repaid to have forfeitures restored at the end of the plan year. Loans: Extra Termination Options: Retirement: Early Age and years of service Normal Age Disability Reemployed Participant: 27

30 Mergers & Acquisitions Planning Guide Summary PLAN DESIGN Merging Plans Merging plans creates uniformity of benefits for current and acquired participants. A current standardized prototype plan cannot amend to add a prior plan. Doing so removes the standardized prototype plan status, thus eliminating reliance on the standardized plan opinion letter. Merging both the acquired plan and existing plan into a new replacement plan could permit continued reliance on a standardized prototype plan opinion letter (assuming no other amendments outside standardized prototype status). Consider IRC 411(d)(6) protected benefit issues for acquired participants (i.e., separate accounting for different participant groups, money and/or benefit options). Combined recordkeeping and reporting can ease administration while potentially lowering expenses over maintaining two (or more) plans. Amend final (combined) plan to: address any protected benefit issues; add new company as participating employer; and/or address years of service issues for eligibility/vesting of acquired participants. (Amending vesting schedules to conform with regulatory mandates may jeopardize prototype or volume submitter plan status if multiple or non-standard schedules are created.) Identify safe harbor status of all plans prior to merger: Are there safe harbor contributions? Any reason to change? Spin-Off/Transfer of Assets A spin-off into an existing plan can create uniformity of benefits for current and acquired participants. Consider IRC 411(d)(6) protected benefit issues for acquired participants (i.e., separate accounting for different participant groups, money and/or benefit options). Combined recordkeeping and reporting can ease administration while potentially lowering expenses over maintaining two (or more) plans. Amend final plan to: address any protected benefit issues; add new company as participating employer; and/or address years of service issues for eligibility/vesting of acquired participants. (Amending the vesting schedule to conform with regulatory mandates may jeopardize prototype or volume submitter plan status if multiple or non-standard schedules are created.) Identify safe harbor status of all plans prior to merger: Are there safe harbor contributions? Any reason to change? 28 ADMIN/COMPLIANCE Vesting: Employees of acquisition target w/3+ years of service have option to remain under prior plan schedule or move to new plan schedule. Vesting can never be reduced for a participant s accrued benefit. (NOTE: The Pension Protection Act requires that all employer contributions to a defined contribution plan must vest under a schedule that is no longer than either a 3-year cliff or a 6 year graded vesting schedule beginning in 2007 [with special rules for collectively bargained plans]). Investment Mapping: Transferring participant accounts by investment option from prior plan investment options to similar investment options in final plan. Nondiscrimination Testing: Changes in number of employees covered under plan or in classes of employees included/excluded from plan will affect test results for meeting nondiscrimination requirements. If each plan meets minimum coverage and general nondiscrimination requirements prior to the transaction and there is no significant change in coverage during the transition period, the merged plan will continue to pass coverage testing and satisfy general nondiscrimination requirements for the plan year in which the merger occurs and the following plan year. Controlled Groups: Merging plans which cover all employees results in one plan thus, no issue for final plan. If certain employee groups or divisions are excluded, nondiscrimination analysis should be made prior to final plan design decisions. Permissive Aggregation: Plans of related groups that are aggregated for coverage testing must be aggregated for ADP/ACP testing and viceversa. Plans may not be aggregated unless they have the same plan year. Vesting: Employees of acquisition target w/3+ years of service have option to remain under prior plan schedule or move to new plan schedule. Vesting can never be reduced for a participant s accrued benefit. (NOTE: The Pension Protection Act requires that all employer contributions to a defined contribution plan must vest under a schedule that is no longer than either a 3-year cliff or a 6 year graded vesting schedule beginning in 2007 [with special rules for collectively bargained plans]). Investment Mapping: Transferring participant accounts by investment option from prior plan investment options to similar investment options in final plan. Nondiscrimination Testing: Changes in number of employees covered under plan or in classes of employees included/excluded from plan will affect test results for meeting nondiscrimination requirements. If each plan meets minimum coverage and general nondiscrimination requirements prior to the transaction and there is no significant change in coverage during the transition period, the spin-off plan will continue to pass coverage testing and satisfy general nondiscrimination requirements for the plan year in which the spin-off occurs and the following plan year. Controlled Groups: If acquisition target is part of a controlled group, a spin-off may require maintaining separate plans for separate benefit structures or plan-to-plan transfer of assets/liabilities directly to acquiring company s plan. Permissive Aggregation: Plans of related groups that are aggregated for coverage testing must be aggregated for ADP/ACP testing and viceversa. Plans may not be aggregated unless they have the same plan year.

31 Mergers & Acquisitions Planning Guide Summary (continued) PLAN DESIGN Maintain Separate Plans Freezing a Plan Terminating a Plan Maintaining separate plans may be required as part of purchase/sale of acquisition target. You may want to amend the plan(s) to create uniformity of benefits if required to maintain separate plans. Benefits of this Option: Permits different benefits for each group of participants; Avoids need to terminate one plan and amend the other. Identify safe harbor status of all plans: Are there safe harbor contributions? Any reason to change? Plan must be amended to freeze participation and benefit accruals. Plan may also be amended to freeze participation only ( soft freeze ). Future amendments may be required to maintain compliance with legislative changes. Acquiring company's plan may need to be amended to permit acquisition target s employees to participate on a prospective basis. If acquired 401(k) plan is terminated after completion of the acquisition, plan assets cannot be distributed to the participants if: (1) acquiring company also maintains a qualified DC plan; and (2) greater than 2% of the acquisition target s eligible employees will become eligible to participate in the acquiring company s plan during the 24 month period starting 12 months before termination.* Assets can, however, be transferred to the acquiring company s plan. *EXCEPTION: If acquisition target terminates the plan prior to the acquisition effective date, the plan assets may be distributed to the plan s participants as terminated plan assets and rolled over to IRAs or the acquiring company s plan, if allowed. (May require amending ongoing plan to accept rollover contributions. Plan sponsors may also wish to amend the ongoing plan to address years of service for eligibility and vesting of acquired participants.) ADMIN/COMPLIANCE Controlled Groups: If acquisition target is part of a controlled group, the acquisition may require maintaining separate plans for separate benefit structures or plan-to-plan transfer of assets/liabilities directly to the acquiring company s plan. Nondiscrimination Testing: If each plan separately meets the minimum coverage and nondiscrimination requirements prior to the acquisition and there is no significant change in coverage during the transition period, they will be deemed to meet those requirements throughout the plan year in which the acquisition took place and the following plan year. Future coverage testing issues may arise, since participants in one plan must be counted as eligible but not participating employees in the other plan. Must keep frozen plan document up-to-date with legislative changes. No further contributions to frozen plan. When all benefits under frozen plan are paid out, plan is terminated. Termination of, and distributions from, an acquisition target s 401(k) plan by the acquiring company is possible if less than 2% of the acquisition target s eligible employees will become eligible to participate in the acquiring company s plan during the 24 month period starting 12 months before termination. This emphasizes the need to consider termination of an acquisition target s plan by the acquisition target, PRIOR TO THE ACQUISITION EFFECTIVE DATE. 29

32 Mergers & Acquisitions Planning Guide Summary (continued) FILINGS Merging Plans Form 5300 (if plan is outside the prototype or volume submitter status) or 5307 (for prototype or volume submitter plans): Application for Determination for Employee Benefit Plan if a determination letter is desired. Filing is strongly recommended within the applicable IRC 401(b) remedial amendment period for a plan that has language outside the prototype or volume submitter pre-approved language. Form 5310-A: Both the acquisition target s plan and your plan may be required to file Form 5310-A Notice of Plan Merger or Consolidation, Spin-off, or Transfer of Plan Assets or Liabilities. Form 5310: Application for Determination Upon Termination should be filed if, after acquiring a plan, one plan is to be terminated and merged into other. (Filing is strongly recommended but not required.) Form 5500: Each plan is required to timely file a Form 5500 annually until assets of both plans are merged. Once assets are merged, a final Form 5500 should be filed for acquired plan. Contact current recordkeeper of acquired plan on this matter. ERISA 204(h) Notice (for money purchase plans): Generally must be sent to employees at least 45 days (15 days for small plans or for acquisitions or dispositions) before effective date of any amendment eliminating or significantly reducing the rate of future benefit accruals from what was originally provided in either plan. SPD: Provide participants with copy of successor plan SPD & SMMs, statement describing merger and benefits provided, and notice of availability of certain documents within 90 days of merger. Spin-Off/Transfer of Assets Form 5300 (if plan is outside the prototype or volume submitter status) or 5307 (for prototype or volume submitter plans): Application for Determination for Employee Benefit Plan if a determination letter is desired. Filing is strongly recommended within the applicable IRC 401(b) remedial amendment period for a plan that has language outside the prototype or volume submitter pre-approved language. Form 5310-A: Both the acquisition target s plan and your plan may be required to file Form 5310-A Notice of Plan Merger or Consolidation, Spin-off, or Transfer of Plan Assets or Liabilities. Form 5310: Application for Determination Upon Termination should be filed if, after acquiring a plan, one plan is to be terminated and merged into other. (Filing is strongly recommended but not required.) Form 5500: Each plan is required to timely file a Form 5500 annually. Coordination of filings with ongoing plan from which spin-off occurs is strongly recommended. Contact current recordkeeper of spun-off plan on this matter. ERISA 204(h) Notice (for money purchase plans): Generally must be sent to employees at least 45 days (15 days for small plans or for acquisitions or dispositions) before effective date of any amendment eliminating or significantly reducing the rate of future benefit accruals from what was originally provided in either plan. SPD: Participants must receive a revised SPD within 90 days of the event informing them of the name of the plan providing benefits, etc. Send to all participants under spun-off plan. EXPENSES A single plan is generally less expensive to maintain than two separate plans. If plans are only merged for administration (i.e., the assets remain separate), the costs of separate accounting in a merged single plan may be more expensive than the administrative costs of maintaining two separate plans. One Time Costs: Conversion costs may apply. Filing(s) You may need to file a Form 5310-A which has an associated user fee. The Form 5300/5307 related fee depends on the demonstrations included with the 5300/5307 filing and if the plan is a multiple employer plan. An advance determination could also be filed. Plan/Contract amendments may be needed for existing clients to add acquired plan and/or employer to the contract and/or plan. There may be costs associated with communicating any changes. If currently using a standardized prototype plan, may need to re-file as nonstandardized due to merger, OR may need to file for a new determination letter if substantial amendments required to merge plans. A single plan is generally less expensive to maintain than two separate plans. If plans are only merged for administration (i.e., the assets remain separate), the costs of separate accounting in a merged single plan may be more expensive than the administrative costs of maintaining two separate plans. One Time Costs: Conversion costs may apply. Filing(s) You may need to file a Form 5310-A which has an associated user fee. The Form 5300/5307 related fee depends on the demonstrations included with the 5300/5307 filing and if the plan is a multiple employer plan. An advance determination could also be filed. Plan/Contract amendments may be needed for existing clients to add acquired plan and/or employer to the contract and/or plan. There may be costs associated with communicating any changes. If currently using a standardized prototype plan, may need to re-file as nonstandardized due to merger, OR may need to file for a new determination letter if substantial amendments required to merge plans. 30

33 Mergers & Acquisitions Planning Guide Summary (continued) FILINGS Maintaining Separate Plans Freezing a Plan Terminating a Plan Each plan is required to make all standard government filings each year it is maintained as a separate plan (e.g., Form 5500, Form 1099-R, etc.). Form 1099-R: Distribute to participants and IRS as required. Form 5500: Each plan is required to timely file a Form 5500 annually. Frozen plan is required to continue making all standard government filings annually while assets remain in plan. Form 5310: Application for Determination Upon Termination File once all monies are paid out of plan and plan is subsequently terminated. (Filing is strongly recommended but not required.) Form 5500: Frozen plan is required to timely file a Form 5500 annually while assets remain in plan. ERISA 204(h) Notice (for money purchase plans): Generally must be sent to employees at least 45 days (15 days for small plans or for acquisitions or dispositions) before effective date of any amendment eliminating or significantly reducing the rate of future benefit accruals from what was originally provided in either plan. Revised SPD: Participants must receive a revised SPD or SMM within prescribed timeframe for plan amendments (generally no later than 210 days after close of plan year in which amendment(s) was adopted) informing them that benefit accruals and participation have been frozen under plan. (Note: a 204(h) notice serves as an SMM for money purchase plans.) Form 1099-R: Distribute to participants and file with the IRS. Form 5310: Application for Determination Upon Termination. If plan does not have a recent IRS favorable determination letter covering all applicable nondiscrimination testing issues, sponsor must include these types of demonstrations with Form 5310 filing. (Filing is strongly recommended but not required.) Form 5500: Terminating plan is required to timely file a Form 5500 annually until all plan assets are distributed. Once all assets are distributed, a final Form 5500 should be filed for the terminated plan. ERISA 204(h) Notice (for money purchase plans): Generally must be sent to employees at least 45 days (15 days for small plans or for acquisitions or dispositions) before effective date of any amendment eliminating or significantly reducing the rate of future benefit accruals from what was originally provided in either plan. Exception: If acquisition target terminates the plan prior to the acquisition effective date, the plan assets may be distributed to the plan s participants as terminated plan assets and rolled over to IRAs or the acquiring company s plan, if allowed. (This may require amending ongoing plan to accept rollover contributions. Plan sponsors may also wish to amend the ongoing plan to address years of service for eligibility and vesting of acquired participants.) EXPENSES The ongoing administrative expense of maintaining separate plans is generally higher than maintaining one merged plan. Depending on the complexity (and similarity) of the plans, this may be a more or less expensive option than merging plans for administration purposes only and then paying to keep the plan assets separated for accounting purposes. One Time Costs: There may be costs associated with communicating any changes. Cost of maintaining frozen plan in compliance with ongoing legislation and required government filings tends to be more expensive than other alternatives. Depending on the complexity (and similarity) of the plans, this may be a more or less expensive option than merging plans for administration purposes only and then paying to keep the plan assets separated for accounting purposes. One Time Costs: There may be costs associated with communicating any changes. Filing(s) The Form 5300/5307/5310 related fee depends on the demonstrations included with the filing and if the plan is a multiple employer plan. An advance determination could also be filed. One Time Costs: Plan termination administrative cost may apply for terminating acquisition target plan following completion of acquisition. Plan/Contract amendments may be needed to add acquired plan and/or employer to the ongoing contract and/or plan. There may be costs associated with communicating any changes. Cost of filing for determination of termination for prior plan (if not handled by acquisition target prior to acquisition effective date). Cost will vary according to type of demonstrations included in submission. C:

34 Guidelines for Plan v. Settlor Expenses Type of Plan Activity Plan Establishment Plan Design Plan Administration Employer Pays (for settlor actions) Determining the type of plan to establish Cost analysis, design proposals Drafting initial plan document (which may include trust) Drafting corporate resolutions Legal fees Consulting fees regarding plan design Legal Fees: plan design studies, projected cost studies Legal Fees: benefit formula/allocation changes Financial impact analysis of proposed changes Plan benefit studies for potential amendments Actuarial analyses for proposed plan design studies Consulting fees, such as analysis of available options under GUST (e.g., $5,000 cash-out, HCE top-20% election, GATT) Plan design proposals (e.g., spin-off, conversion to cash balance) Amending plan benefit formula Amending plan to provide for spin-off Amending plan to include an early retirement window benefit Any discretionary amendment Union negotiations Early retirement window benefit calculations made before proposed amendment is adopted Establishing a participant loan program Overhead Costs: office space Recordkeeping Fees: systems changes due to plan design change; computing annual deduction limits Disclosure Documents: SPDs or SMMs revised for plan design changes If applicable, summary information in a booklet that relates to non-pension plan matters (e.g., vacation policy, holiday schedule) Plan Pays 1 (for actions that relate to plan administration and maintenance) Drafting trust document (if separate from plan document) Determination letter requests for plan amendments to maintain qualified status due to changes in tax law Determining plan benefits after implementation of amendments Amending for changes in fiduciary responsibilities Amending due to ERISA Title I compliance Amending for regulatory-mandated changes (e.g., EGTRRA) Early retirement window benefit calculations made after amendment is adopted Operating an established participant loan program Overhead Costs: supplies and equipment utilized to provide services to the plan (telephone voice response system, retirement planning software) Recordkeeping Fees: routine expenses and systems changes due to changes in the law. Disclosure Documents: initial SPD, successive SPDs, SMMs, SPDs and SMMs revised for law changes, and other planrelated communications (i.e., enrollment, RMDs, retirement, participant educational seminars, etc.) Produce and distribute summary information about the pension plan On-going benefit calculations (Note: Benefit calculations for different distribution options may be borne by the participant, rather than plan.) Service provider fees (trustee, accounting, custodial, investment management, participant-level investment advice, legal fees relating to plan administrative issues [non-settlor issues] and reporting fees) Start-up fees associated with administrative outsourcing Determining DRO qualified status (Note: Fees may be charged to individual participants, at plan fiduciary s discretion.) 32

35 Guidelines for Plan v. Settlor Expenses continued Type of Plan Activity Plan Maintenance Employer Pays (for settlor actions) FASB Compliance Statements No. 87, 88, 106, 112, 132 Non-routine nondiscrimination testing done in advance of a plan change (e.g., coverage or general tests done with proposed early retirement window benefit amendment to DB plan) Plan Pays 1 (for actions that relate to plan administration and maintenance) Fidelity bond Routine nondiscrimination testing Transaction fees (hardships, installments, checks, loans) (Note: Expenses for hardships and processing distributions may be borne by the participant receiving the distribution.) Retirement and disability annual maintenance charges ERISA-required communications (e.g., SPDs, SARs and individual benefit statements for individual requests) Fiduciary insurance Periodic valuation (daily, annual, etc.) Actuarial Fees: costs associated with changing actuaries Plan-to-plan transfer computations Fees incurred in locating lost individuals for benefit payments (Note: Such expenses may be charged to the missing participant.) Form 5500 series preparation and audited financials prepared by certified public accountant Periodic compliance auditing Government- Imposed Fees Plan-related penalties and fines Compliance programs, including IRS s EPCRS costs, DOL s 5500 late filing program EPCRS (Audit CAP sanction, VCP compliance fee) DOL Voluntary Fiduciary Correction Program Determining plan spin-off benefits (amount) Determination letter requests for proposed or adopted plan design amendments PBGC premiums (PBGC Advisory Letter 74-10) Plan Termination Study to terminate the plan Analysis of recoverable expenses after plan termination Successor plan analysis and consulting fees Legal fees incurred in determining to terminate the plan Determination letter request for terminating plan PBGC termination fees Contract termination charges Service provider termination charges Implementing plan termination (auditing the plan, preparing/filing annual reports, preparing benefit statements, calculating benefits, notifying participants of benefits under the plan) C: Plan administrators must determine, as plan fiduciaries, whether an expense is payable from the plan. However, the plan sponsor may elect to pay for such expenses. Plan documents should be reviewed to determine if plan assets could pay for plan administrative expenses. Each analysis is a factual determination, which should be made prudently and in the interest of plan participants and beneficiaries. If it is determined that an expense is payable from plan assets, the next question the fiduciary should answer is whether the expense is a reasonable expense. This Plan Expenses Checklist is not intended for use by multi employer plans. Please note that this list is not intended to be a comprehensive list. Rather, as expenses are incurred, a factual analysis should be made as to the nature of the services (e.g., proposed plan changes, statutory requirements). In reviewing expenses, you may determine that an expense represents both settlor (plan sponsor) fees and expenses that may be paid from plan assets. In such a situation, the expense may require further breakdown. This Plan Expenses Checklist is distributed with the understanding that MassMutual is not engaged in rendering legal advice or in providing accounting service. If legal advice or accounting service is needed, the assistance of an attorney or an accountant should be sought. 33

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39 MassMutual. We ll help you get there.

40 Securities offered through registered representatives of MML Investors Services, Inc., member FINRA and SIPC ( and State Street, Springfield, MA Massachusetts Mutual Life Insurance Company, Springfield, MA. All rights reserved. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) [of which Retirement Services is a division] and its affiliated companies and sales representatives. L7350DC 809 C: