What Happens to My Pension if My Company Is Sold?
Learn the implications for your pension when your company is acquired. Get insights into safeguarding your retirement savings.
When a company is sold, employees often face uncertainty about their retirement savings. A pension plan’s future depends on its type and the acquisition’s terms. Understanding these distinctions and governing regulations helps employees protect their benefits.
Understanding Your Pension Plan
Employer-sponsored retirement plans fall into two main categories: defined benefit and defined contribution plans. These differ significantly in how benefits are determined, who bears investment risk, and how they are treated during a company sale. Knowing your plan type is the first step in understanding an acquisition’s impact.
A defined benefit plan, or traditional pension, promises a specific payout at retirement. This payout is calculated using a formula considering an employee’s years of service and salary history. The employer assumes investment risk, ensuring sufficient funds are available regardless of market performance.
A defined contribution plan (e.g., 401(k), 403(b)) establishes individual accounts. Contributions are made by the employee, employer, or both. The retirement benefit’s value depends on total contributions and investment performance. Employees typically bear investment risk and decide how their account is invested.
Impact on Defined Benefit Plans
When a company with a defined benefit plan is sold, the acquiring company may assume responsibility for the existing plan, continuing its terms and obligations. The new ownership becomes the plan sponsor, maintaining its structure and benefit promises.
Alternatively, the defined benefit plan may be terminated. If terminated, vested benefits are typically secured by purchasing annuities from an insurance company, ensuring participants receive future payments. The Pension Benefit Guaranty Corporation (PBGC), a federal agency, protects the retirement incomes of over 44 million Americans in private-sector defined benefit pension plans.
The PBGC insures covered defined benefit plans, providing benefits up to certain legal limits if a plan terminates with insufficient funds. For 2025, the maximum monthly guarantee for a single-life annuity for a 65-year-old is $12,336.82, adjusted for different ages or survivor benefits. The PBGC is funded by employer premiums, not taxpayer funding. A plan may also be “frozen,” meaning no new benefits accrue, but existing vested benefits remain protected.
Impact on Defined Contribution Plans
Company sales can affect defined contribution plans (e.g., 401(k)s). Common outcomes include merging the existing plan into the acquiring company’s plan, combining assets and accounts. Another possibility is transferring assets to a new plan created by the acquiring entity for acquired employees.
Employees typically have several options for vested balances if a defined contribution plan is terminated or transferred. They may roll over funds directly into an Individual Retirement Account (IRA) for continued tax-deferred growth, roll over funds into the new employer’s plan if it accepts such transfers, or take a cash distribution, though this carries significant tax implications.
Taking a cash distribution from a defined contribution plan often results in immediate taxation as ordinary income. If the employee is under age 59½, a 10% early withdrawal penalty typically applies, unless an IRS exception is met. When a direct rollover is not performed, a mandatory 20% federal income tax withholding is generally applied by the plan administrator. To complete an indirect rollover and avoid additional taxes and penalties, the employee must deposit the full amount, including the withheld 20%, into a new qualified retirement account within 60 days of receiving the distribution.
Vesting schedules determine an employee’s ownership of employer contributions. Unvested employer contributions may become fully vested upon plan termination due to a company sale, depending on plan provisions and IRS rules.
Employee Actions and Protections
During a company sale, employees should monitor communications from both employers regarding pension plans. Official notices detail plan changes, new administrators, updated documents, and timelines. Understanding these communications is important for informed retirement savings choices.
Employees should proactively seek specific information, such as how benefits will be calculated or procedures for transferring funds. Obtain copies of updated Summary Plan Descriptions (SPDs) and other relevant plan documents. These documents outline the retirement plan’s terms and conditions and any modifications due to the acquisition.
The Employee Retirement Income Security Act of 1974 (ERISA) provides federal protections for private sector pension plans, setting minimum standards for their operation. ERISA mandates transparency in plan administration and establishes fiduciary responsibilities for those who manage plan assets, aiming to safeguard participants’ interests. This law also gives participants the right to sue for benefits and breaches of fiduciary duty. Employers involved in acquisitions must conduct thorough due diligence to identify and assess ERISA-governed plans and their funding status, as well as ensure compliance with disclosure requirements.
Consulting with a financial advisor or tax professional is advisable. They can provide personalized guidance on distribution options, tax implications, and strategies for managing retirement assets post-acquisition. Their expertise helps employees navigate their specific situation and ensure financial well-being.