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Merging MPP into PS mid-plan year


Guest Gary M
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Guest Gary M

A client has a MPP and PS plan (paired plans), both with calendar plan years. He wants to merge the MMP into the PS on 6/1. However, the MPP's ER contribution is 10% of Compensation for the Plan Year, which in my understanding would normally require the merger to be postponed until the beginning of the next plan year.

My proposed solution is to amend the MPP to a short plan year (1/1 to 5/31), fund the 10% contribution for the short plan year, and merge the two plans effective 6/1. Anyone see a problem with this approach? Any other comments/options?

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We've been doing a lot of these mergers. If the plan requires 1000 hours of service for an allocation, and no one has worked 1000 hours yet, this should be a good time to do the merger. We do a corporate resolution indicating that the merger will take place as of [date] and amending the contribution formula for the MP to zero percent. Don't forget the Notice to Employees.

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Guest Gary M

Thanks for the response. Unfortunately, the requirements for the allocation in this case are either work 501 hours OR be employed on the last day of the plan year, so these participants have already accrued a right to the benefit.

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We're not that far away from June 1, so at this point it won't save much. But why wait for the June date? If you provide the EE notice today and amend the MP to zero as of May 1, the ER is only responsible for 4 months of accrued contributions under the MP plan. However, one month's worth of contributions isn't worth the rush unless we're talking about a lot of participants.

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Guest Gary M

Katie, what I'm saying is that the plan only requires 501 hours to earn a right to the MPP contribution, so at this point, most employees have already earned the right to this year's contribution. The issue is: what options are there to amend the plan mid-year in view of the fact that the benefit is defined as a % of annual Compensation, is funded annually, and ees have already accrued the right to the benefit (no 1000 hour rule)?

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The participants are only accruing a benefit in the MP plan until the contribution formula is amended to zero. They should receive 10% of compensation earned up to that date, which could be deposited after the end of the year or earlier. I believe that there's no problem making the contribution to the PS plan, since the MP will be merged into the PS before the required contribution is made.

Perhaps we could get the opinion of someone more knowledgable to confirm or refute my analysis.

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I think it is an open question. If your plan document says that once you have 500 Hours you have earned X% of an entire plan year's compensation, then arguably you do have a 411(d)(6) issue if you change the formula because the employee has already earned a benefit based on an entire year of compensation.

However, an argument can also be made that a benefit does not accrue until the compensation is earned. At least in a plan termination context IRS officials informally agreed that only the compensation up to the date of termination should be considered. (Kateinny and Archimage's position).

The following is question and answer 72 from the 1998 IRS Q&A Session at the ASPA Annual Conference:

72. A calendar year 10% MP [that is, money purchase pension] plan has no last day employment condition, no hours requirement for receiving a contribution, and defines compensation as compensation paid during the plan year. It terminates on 6/30/98 with all participants having accrued 1,000 hours of service in the plan year to that date. On the same day, the sole NHCE [nonhighly compensated employee] terminates employment. The sole HCE [highly compensated employee] continues in employment through the end of the year and beyond. The participating NHCE had $10K in compensation to the date of termination; the participating HCE had $50K in comp to date of plan termination and a total of $100K in compensation for the entire plan year.

Is the contribution required to satisfy 411(d)(6) (and 412):

a) $0 [applying RR 79-237];

b) $6,000 counting compensation to date of plan termination; or

c) $11,000 counting all compensation for all participants for the entire plan year.

IRS Response: B is the correct answer.

Interestingly the very next year at the very same conference to almost the exact same question they gave the old "this will be discussed from the podium" response. I wasn't there so I don't know what the repsonse was from the podium.

92. Can a money purchase plan with no last day employment requirement terminate now prospectively so that no contributions accrue for the rest of the year? Here are three possible ways of looking at it; which is correct?

A. Aggressive position - no contributions required or allowable for the CURRENT plan year. See RR-79-237.

B. Conservative position - contribution required for current plan year based on total compensation for the entire plan year.

C. Medium position - contribution required for current plan year but only based on compensation earned to the later of the adoption date or the effective date of the plan termination/plan amendment.

This will be discussed from the podium.

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Be careful doing the merger as of 6/1 since it will end your plan year. Administratively it is sometimes easier to "freeze" the MP plan as of whatever date, then merge it as of the end of the plan year 12/31. Then your final 5500 is on the same time schedule as your PS 5500. Sometimes those "odd" filing deadlines get missed...

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