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Plan termination vs Plan merger


Santo Gold

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An employer has 2 401k plans covering 2 different groups of employees. They are considering eliminating one of the plans and have everyone covered in 1 plan. Would a plan merger make more sense than a plan termination? Are there any obvious pros/cons to doing a merger vs a termination, or vice-versa? Am I correct in that in a merger, there is no option for a participant to receive a distribution whereas with a plan termination the participants could take distribution? Finally, in a merger, accounts do not automatically fully vest, correct? Thanks for any insight!

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Santo Gold,

You are correct. In merger you don't have to vest, and participants have no option of distribution. You would be better off doing merger of two plans rather than terminating one plan.

If you terminate one plan and allow participants to cash out you may face serious employee moral problems with the group not allowed access to their money. Employees are like children when it comes to issue of money.

JanetM CPA, MBA

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Thank you Janet M. 2 more questions come to mind if we merge: Other than making elections on what new investments (if any.....I think the plans are identical in all BRF as well as investment options) they want, is there anything the participants of the "old" plan need to sign off on? If they have no options on what to do with their money, I can't see where they would need to sign off on anything. Also, it's been a long time since I handled a 5310-A; is that the only form needed to report the merger (other than the final 5550 and pertinent questions on that form) and is there a user fee associated with that form?

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The plans should have identical BRF otherwise you have to amend the receiving plan to permit whatever was permitted (e.g. distribution at a particular event/point in time) to prevent a 411(d)(6) cutback.

No, no sign-off. It's a sponsor action, not an employee action.

No 5310 needed if it's a DC plan with certain conditions, which you probably meet (see details in the instructions - don't remember off the top of my head but basically if the individual accounts before and after the merger are the same you're OK.)

Ed Snyder

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You may not be able to distribute to the employees upon termination if you have a successor plan sponsored by the same employer and covering same employees. You might just have to "freeze" the one plan (no new contributions). So merger might be better -- unless you think that one of the plans has had a lot of problems and you don't want to taint the other plan.

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Missing from the above discussion is whether the "disappearing" plan has any problems, especially those that would cause an IRS or DOL auditor to be concerned. If so, making the plan "go away" will not make the problems go away. If this plan was "aqcuired", then the sponsor may have also acquired the problems withouth knowledge.

The sponsor may wish to make sure it has done its own due diligence about this issue, and discuss with its ERISA counsel, before proceeding.

The statement by Bird about "should have identical BRF" is a bit overdone. Consultation with counsel will show that amending either plan before merger may be a useful step in this process, depending on the provisions of both. Difficult to make that determination here without complete review of such provisions.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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The statement by Bird about "should have identical BRF" is a bit overdone.

Maybe (OK, yes). You have to make sure that there is no cutback in benefits, and since "BRF" was used in a preceding post I used it casually...but no, I suppose not every BRF is subject to anti-cutback.

Ed Snyder

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