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EGB

termination of (k) portion of KSOP prior to corporate merger

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EGB    1

Our client ("Buyer") is purchasing a company maintaining a KSOP. The KSOP is to be terminated. Buyer, for a number of reasons, wants to terminate the KSOP shortly after closing, but wants the newly-acquired employees to begin participating in Buyer's 401(k) plan immediatley following closing. To avoid a deemed merger of the KSOP and the buyer's 401(k) plan and to avoid a one-year hold-out of the newly-acquired employees' participation in the Buyer's 401(k) plan, will it suffice to terminate only the (k) portion of the KSOP prior to closing and terminate the ESOP after closing?

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IRC401    0

I don't understand your concern about a "deemed merger" and am not familiar with the concept.

Why doesn't your client simply freeze the KSOP and amend its 401(k) plan in order to allow the employees of the newly acquired company to participate?

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EGB    1

My terminology was not accurate - there is not necessarily a deemed merger. Under the successor plan rules(401(k)(10) and 1.401(k)-1(d)(3)), if the Seller has a 401(k) plan that you want to terminate (rather than merge with the Buyer's plan or maintain along with the Buyer's plan),you generally need to terminate the Seller's 401(k) prior to the acquisition or merger in order to be able to make distributions upon termination of the plan. If you wait to terminate the plan after the merger, the successor plan regulations will either require that the newly-acquired employees not participate in the Buyer's 401(k) plan for a period of one year, or, if such employees are participating in the Buyer's plan, that no distributions from the terminated plan be allowed.

In our situation, we want to terminate the ESOP, not freeze it. However, we don't want to terminate the ESOP until after closing. My hope is that I can terminate just the k portion of the plan prior to closing to avoid the successor plan rules. I have never had to address this situation before.

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IRC401    0

As far as I know, you can't terminate (as opposed to freeze) part of a plan. You could, however, split the plan and terminate the spun-off portion.

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RLL    1

Of course you can terminate only one portion of a combination plan, including a KSOP!

Let's say that you have a combination profit sharing plan/money purchase plan.....nothing would prevent you from terminating the profit sharing portion while continuing the money purchase portion.

Likewise, if you have a KSOP which is a combination of a stock bonus plan (the ESOP) and a profit sharing plan (the non-ESOP 401(k) plan), there is no reason why you can't terminate the non-ESOP 401(k) portion while still maintaining the ESOP portion (which then may be terminated at a later date).

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IRC401    0

I must have a different concept of a plan than RLL. To me you either have a single plan within the meaning of the 414(l) regs, or you don't. If you have a single plan, you either terminate it, or you don't. If you want to terminate part of it, you split it. If you attempt to terminate part of it, you have an in-service distribution.

I still don't understand the concept of a money purchase/profit-sharing plan. Congress doesn't appear to think that they should exist, but you can make the case that the prohibition doesn't take effect until the IRS issues regs. See 401(a)(27)(B).

I am open to the possibility that anyone can slip anything past the IRS in the determination letter process.

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RLL    1

IRC401 ---

We certainly do have very different concepts of what constitutes a "plan." Perhaps I've seen more creativity in plan design (using various "combination plans") over the years.

A very common example of a "combination plan" in the ESOP area is an ESOP which constitutes a stock bonus plan coupled with a money purchase pension plan, as described in IRC section 4975(e)(7) and ERISA section 407(d)(6). Such an ESOP constitutes one plan for purposes of ERISA Title I requirements, but is composed of two component "plans" under IRC section 401(a). Section 401(a)(27)(B) is easily complied with by specifying that the money purchase portion of the ESOP is a money purchase pension plan. [Likewise, it's very easy to specify/identify the existence of the separate components of a combination profit sharing plan/money purchase plan in order to satisfy section 401(a)(27)(B)].

Such a "combination ESOP" is usually established through one plan document (often with a separate trust agreement) and funded through a single trust, and one SPD is usually used with such an ESOP. A single Form 5500 may be filed for the ESOP. But the ESOP is still composed of two separate "plans" under section 401(a). Certainly you've come across such a "combination ESOP" in your practice.

Item 5 of Form 5309 (as well as Form 5300) treats such a "combination ESOP" as one "plan" for purposes of IRS Applications for Determination.....so it hardly seems like anyone is trying to "slip anything past the IRS."

This traditional "combination ESOP" (recognized under the IRC and ERISA since 1974) may very well fade away in light of the recent amendment to the deduction limit under IRC section 404(a)(3).

It is also very common for a single "KSOP" to be composed of an ESOP (a stock bonus plan) and a non-ESOP profit sharing plan. The fact that the 401(k) and 401(m) regulations provide for separate testing of ESOP and non-ESOP portions of a "401(k) plan" obviously indicates that the IRS is very aware of such "combination plans."

Also, you should note that the instructions for completing line 8 of Form 5500 indicate that a "plan" filing the Annual Return/Report may be composed of multiple "plans" under IRC section 401(a). Apparently, the DOL and the IRS both recognize the existence of "combination plans" of various types.

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I concur in the last post by RLL.

I asked him in my last post about filing the Form 5310 simply because I had (fortunately) never encountered the situation where I was terminating only a portion of a plan before and wanted the benefit of his insight on the issue.

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IRC401    0

RLL-

I should thank you for getting the juices flowing. To the best of my recollection, all of the KSOPs that I have dealt with (which I could count on one hand) have all been single plans, and I instinctively thought of a KSOP as a single plan.

If the plan in question is a combination plan, I agree that one of the underlying plans could be terminated, but wouldn't the company have to terminate either the profit-sharing or the stock bonus plan (as opposed to the 401(k) arrangement)? The 401(k) arrangement could cross over both plans.

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