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Company with SARSEP purchasing Company with 401(k)


Guest philc
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Guest philc

Co. A maintains a SARSEP (5305A-SEP) and contributions have been made for this year (2004). They are in the process of purchasing Co. B this year, after which Co. B will no longer exist as a separate entity. Co. B has a 401(k).

Co. A would like to terminate the SARSEP this year and assume sponsorship of former Co. B's plan as of the purchase date so all their eligible employees are covered under the 401(k).

Issue I see is 5305 indicates can't use this form if the employer "currently maintains" another plan during the same year. As of the establishment of the 5305A-SEP Co. A did NOT "urrently maintain"any other plan. Does that matter?

Or if they assume Co. B's plan does that essentially negate the 5305 and they MUST move to a Prototype SEP?

What alternatives does Co. A have?

Is there any transition relief in these type of situations?

Would Co. A have to "freeze" the former Co. B's plan as of the purchase not allowing any more contributions for the remainder of this year, terminate the SEP as of the end of the year and then "unfreeze" the 401(k) beginning next year for all?

What would happen to the former Co. B employees. Could they participate in the SARSEP?

The solution wouldn't be that Co. B should terminate their plan before the purchase date would it?

Appreciate any suggestions.

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Issue I see is 5305 indicates can't use this form if the employer "currently maintains" another plan during the same year. As of the establishment of the 5305A-SEP Co. A did NOT "urrently maintain"any other plan. Does that matter?

If the other plan was maintained during the same year, then there is a problem that a prototype document would solve.

It is unlikely that employees of B would be eligible to participate in the SARSEP for 2004 if there is a service requirement. Also, the SARSEP is grandfathered, why get rid of it? The employer may have also grown to the point where elective contributions may no longer be permitted under the SARSEP. I have assumed that "A" and "B" are not related, controlled, or affiliated employers.

Any contributions made under the SARSEP eat the otherwise applicable P/S limit deduction limit under Code Section 404. Elective contributions made to SARSEP need to be considered in 401(k) plan under Code Section 402(g).

Hope this helps.

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Guest philc

Co. A (with the SARSEP) will be purchasing Co. B (with the 401(k)) this year. Only Co. A will exist after the purchase.

So are you saying Co. A can terminate the SARSEP only if they amend to a Prototype this year?

Can Co. A keep the SARSEP this year while at the same time become the sponsor of the 401(k) of the former Co. B? Does the 5305A-SEP allow for transition relief in these types of acquisition situations? Or Can they (Co.A) do this (maintain the 2 plans for the remainder of this year) only if they amend to a Prototype from 5305-SEP?

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Yes. Yes. No. Yes.

Amend to prototype this year and discontinue contributions effective 2005. The new employees (formally of B) will not be eligible until 2005 (assuming a service requirement is imposed). The 401(k) may have to be amended to permit company A's employees to participate upon adoption (if the plan has a service requirement). No transition relief available for SARSEP.

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