After a Merger, what is a “410(b) Transition Period”?
A 410(b) transition period is a period following a transaction in which a company that maintains a qualified plan (the “Buyer”) merges with or acquires another company with a qualified plan (the “Acquired Company”) (the “Transaction”), during which coverage may be tested separately rather than on an aggregated basis (the “Transition Period”). This Transition Period allows time for the plans to be merged or amended to ensure that the plans pass coverage testing on an aggregated basis.
What are the requirements to qualify for a Transition Period? All of the following criteria must be satisfied to qualify for a Transition Period:
There must be change in the controlled or affiliated service group status of a company (i.e., a mere change in some ownership may not be sufficient).
The plan must have met the coverage requirements under Code Section 410(b) immediately prior to the closing of the Transaction.
Are there any requirements to maintain the Transition Period? All of the following criteria must be satisfied to maintain the Transition Period for its maximum period:
In general, no substantial amendments may be made to the terms of the plan during the maximum Transition Period
In general, no substantial changes in coverage under the plan may occur during the Transition Period (other than as a result of the transaction)
How long does a Transition Period last? Generally, from the date of the closing of the Transaction to the end of the Plan Year following the year in which the Transaction closed (but shortened in some situations).
What happens if there is no Transition Period? The plan must meet the minimum coverage requirements under Section 410(b) on a controlled or affiliated service group basis as of the later of the date of closing of the transaction or the last day of the transition period (if it is shortened). If the plan does not satisfy the minimum coverage requirement, it could be disqualified. See http://www.boutwellfay.com/wp-content/uploads/2016/06/Plan-Disqualification-FAQ-160609.pdf.