We deal with many solo business owners. But sometimes business owners merge their businesses for a variety of reasons
When multiple businesses merge, their retirement plan structure often becomes one of the most complex issues to resolve. This is especially true for cash balance plans and other defined benefit structures.
In this post, we will discuss the available options when businesses are combined. We will present the pros and cons and offer some best practices. Let’s jump in!
Understanding Control Group and Affiliated Service Group Rules
When multiple business owners combine operations, the IRS often considers the new entity a controlled group if ownership exceeds certain thresholds. A controlled group exists when two or more businesses are connected through common ownership or have the same individuals owning at least 80% of each entity.
An affiliated service group (ASG) is a group of two or more related businesses that are treated as a single employer for retirement plan purposes under IRS rules. This designation was created to prevent business owners from setting up multiple entities to avoid covering certain employees in their retirement plans.
In most cases, affiliated service groups exist among professional practices such as dental, medical, legal, or accounting firms. For example, one company might provide management, billing, or administrative services exclusively to another related company. The key factor is the level of ownership overlap and the interrelationship of services between the entities.
For retirement plan compliance, the impact of a control group or ASG is significant. Once businesses are determined to be part of an affiliated service group, they are treated as one employer when applying retirement plan rules. This affects coverage, contribution limits, and nondiscrimination testing. A plan that previously covered only one company’s employees may now need to include employees from all related entities.
Merger Example
Our example will be three separate dental practices that merge into one large dental practice. When three dentists combine their practices, each brings a separate cash balance plan.
In this dental practice merger, the three dentists now share ownership of one combined office, creating a single controlled group for retirement plan purposes. Here’s where the compliance and administrative questions arise.
In this scenario, three dentists—each with different staff sizes and existing plans—are now part of a controlled group under IRS rules. This means all employees are considered part of one employer for testing and coverage purposes, making coordination of the retirement structure essential for compliance.
The group now has three possible paths: (1) merge all plans into one combined plan, (2) terminate the old plans and establish a new one, or (3) keep the existing plans separate. Each path comes with its own administrative, tax, and operational implications.
Option 1: Merging the Cash Balance Plans
The first option is to merge all three cash balance plans into one unified plan for the new practice. This approach simplifies administration and reduces ongoing costs. Instead of three sets of plan documents, filings, and actuarial valuations, the merged plan consolidates all employees and owners under one structure. It provides a single testing group, uniform contribution design, and consistent benefit formulas across all participants.
However, merging plans is not without challenges. Each of the three existing plans likely has different accrued balances, contribution formulas, and funding histories. Combining them requires actuarial adjustments and transfers of plan assets into a single trust.
Dentists with higher accumulated balances may be reluctant to merge their plan assets, fearing they will lose control or inadvertently subsidize other partners’ benefits. Clear documentation and valuation are critical to maintaining fairness and transparency.
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From an IRS standpoint, a properly executed merger is permissible as long as the new plan satisfies nondiscrimination, accrual, and coverage rules. The plan document must reflect consistent formulas and contribution methods across all employees in the new practice. While merging the plans may create temporary administrative complexity, the long-term efficiency can be significant once the transition is complete.
Option 2: Terminating the Existing Plans and Starting a New One
A second approach is to terminate the three existing cash balance plans and establish one new plan under the merged dental office. This option provides a clean slate. Each dentist retains their accumulated plan balances, which are distributed or rolled over into individual retirement accounts. The new entity then adopts a single plan with uniform contribution and benefit rules for all employees moving forward.
The biggest advantage of this approach is administrative simplicity. The old plans end without requiring asset consolidation or complex actuarial equalization. The new cash balance plan starts fresh, covering all employees under one unified structure. This option also eliminates concerns about one dentist’s assets funding another’s benefits.
However, the IRS may scrutinize this approach under the plan permanency rule, which requires that retirement plans be intended as ongoing arrangements. Terminating a plan too soon after a merger may appear to violate this principle.
Additionally, distributing plan assets to participants—especially owners under age 59½—could trigger early distribution penalties unless the funds are properly rolled into IRAs. Dentists considering this route must work closely with an actuary and plan administrator to ensure compliance with all termination and rollover procedures.
Option 3: Keeping the Existing Plans Separate
The third alternative is to maintain the three cash balance plans as they are, even after the merger. Each dentist continues operating their original plan for their respective employees. This approach avoids the need to merge assets or terminate the existing structures. For dentists who prefer to maintain control over their own retirement plan design and funding, this option offers maximum autonomy.
While this may seem administratively simpler, it introduces significant testing complications. Because the three practices now form a single controlled group, all employees across all plans must be included in combined coverage and nondiscrimination testing.
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If one plan covers only its owner and staff, while another covers a smaller employee group, the aggregate testing could fail. Additionally, employees who now work under one merged business might technically be eligible for all three plans, resulting in multiple allocations for the same individuals.
This option may temporarily preserve existing designs, but it creates long-term compliance risk and unnecessary complexity. Separate plans under a controlled group can be expensive to maintain and harder to manage from both an actuarial and IRS compliance standpoint.
Comparison of the Three Options
The table below summarizes the pros and cons of each approach when combining cash balance plans after a merger.
| Option | Pros | Cons |
|---|---|---|
| Merge Plans | Lower administrative and actuarial costs All employees and owners under one unified plan Simplifies testing and compliance | Different asset balances may cause fairness concerns Complex asset transfers and actuarial equalization Requires plan document updates and re-testing |
| Terminate Plans, Start New One | No need to merge or combine assets Creates one uniform plan going forward Reduces future administrative burden | IRS may question plan permanency Potential early distribution penalties if under age 59½ Requires proper rollover and documentation |
| Keep Existing Plans | No immediate plan changes required Maintains control over existing funding and design Allows each owner to manage their own plan | Must satisfy controlled group testing Employees may receive overlapping contributions Higher administrative and actuarial fees |
This comparison illustrates that while merging or starting a new plan may offer long-term simplicity, keeping the plans separate poses the highest compliance risk. The right choice depends on each dentist’s goals, funding preferences, and willingness to coordinate plan design.
Key Considerations Before Choosing an Option
Before deciding which approach to take, the merged dental practice should carefully analyze several important factors. These considerations help balance fairness, cost, and compliance:
- Plan Balances and Funding Levels: Review each plan’s existing assets to ensure fairness if merging or terminating.
- Participant Ages and Service: Older owners may prefer to preserve accrued benefits, while younger staff may benefit from a unified plan.
- Testing Implications: Consider how each option affects coverage and nondiscrimination under controlled group rules.
- Administrative Costs: Consolidating plans usually lowers fees, but initial merging costs can be significant.
- Tax and Distribution Rules: Ensure any plan termination or rollover complies with IRS requirements to avoid penalties.
- Future Growth and Ownership Changes: A single plan may simplify future transitions and buy-ins.
- Employee Communication: Transparency with staff helps avoid confusion about eligibility and benefits after the merger.
Evaluating these points with the help of an actuary and third-party administrator can prevent costly compliance mistakes and preserve tax advantages.
Strategic Recommendations for Dental Practice Mergers
For most professional practices, merging or terminating existing plans and starting a new one is the most practical approach. It creates a unified structure, reduces administrative duplication, and ensures compliance under controlled group testing.
However, the decision should not be made solely based on convenience. Each dentist’s prior funding history, vested benefits, and contribution goals must be considered carefully.
A merged plan offers the strongest long-term efficiency but requires careful handling of asset equalization. A plan termination with a new start provides simplicity but may raise IRS scrutiny if done prematurely.
Keeping three separate plans is generally discouraged because it creates unnecessary administrative burden and testing risk. The ideal solution typically involves transitioning toward one consolidated plan while protecting existing participant balances.
Working with experienced professionals—including an actuary, ERISA attorney, and third-party administrator—is essential. They can guide the dentists through the merger process, prepare the necessary plan amendments, and ensure smooth compliance with all regulatory standards.
Final Thoughts
When three dental practices merge, their cash balance plans must be restructured to align with IRS controlled group rules. Each option—merging, terminating, or keeping the plans separate—carries unique implications for compliance, taxation, and administration.
Merging plans typically offers the most efficient long-term solution, though it requires trust and collaboration among owners. Terminating and restarting a new plan simplifies operations but may draw IRS scrutiny if not managed correctly. Keeping separate plans avoids short-term disruption but introduces long-term risk and complexity.
The best outcome depends on the dentists’ shared goals and willingness to coordinate funding and benefits. With expert guidance and clear communication, they can design a unified retirement strategy that meets IRS requirements, reduces costs, and supports their long-term financial objectives. For professional groups undergoing a merger, reviewing and aligning cash balance plans early ensures compliance, fairness, and stability for both owners and employees alike.
