Are 457(b) Plan Assets at Risk During an Acquisition?

“He asked ‘What would happen to the 457(b) if we were acquired by another entity?’ (not unusual in the world of health care). He thought that our 457(b) assets might be at risk in such a scenario. Is he correct? We have a rabbi trust if that makes a difference.”

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Excellent question! First of all, the Experts want to emphasize that the current landscape of health care acquisitions is extremely complex. For example, though the responses below reflect what might happen in an asset acquisition, we have seen such business transactions structured in other ways, such as joint ventures, that would completely change the Experts’ responses. Thus, in such cases, you should always consult with counsel well versed in mergers and acquisitions and their impact on 457(b) plans.

Having said that, the Experts can provide some general information in this regard. If the acquirer is a governmental entity, the 457(b) plan in question will become taxable when no longer subject to a substantial risk of forfeiture under 457(f). See Treas. Reg. section 1.457-10(a)(2). Most commonly, such plans are terminated before the employer is taken over by a governmental entity. Prospectively, the government acquirer could have a new funded governmental 457(b) plan, but the assets of the nongovernmental 457(b) of the entity being acquired cannot be transferred or rolled over to it.

However, if the acquirer is another private tax-exempt institution, there can be some credit risk that arises with the acquisition of the firm by such an entity if the acquirer does not resume responsibility for the assets and liabilities of the 457(b) in an asset acquisition and the entity being acquired does not retain sufficient assets to pay the benefits, since the plan itself is unfunded. Having said that, since 457(b) assets are in a rabbi trust in this case, it is possible that the terms of the trust would permit payment of benefits to 457(b) plan participants. Of course, the rabbi trust would need to be carefully reviewed by appropriate counsel to determine impact. Again, whether the acquirer assumes the plan, does not assume the plan, or terminates the plan, will typically be negotiated in the transaction.

Finally, if the acquirer is a for-profit entity, the 457(b) plan of the entity being acquired will generally become subject to the constructive receipt rules of Section 451, which can result in adverse tax consequences for plan participants. Thus, it is likely that the acquirer would wish to terminate the plan and distribute plan assets to participants prior to the acquisition.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.