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401 Chaos

Discretionary Profit Sharing Contribution After Termination

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Target was acquired in a stock deal. As required by Buyer, Target adopted resolutions terminating its 401(k) profit sharing plan immediately prior to termination. Target's plan permitted Target to make discretionary profit sharing contribution at year-end which Target had done in some prior years. Target has not promised any of the 401(k) Plan participants a profit sharing contribution this year and the final Board Resolutions terminating the 401(k) Plan did not mention making a profit sharing contribution in any way. Target had, however, "accrued" an amount on its books that it was planning on making as year-end profit sharing contribution prior to getting sold.

Does the fact that the 401(k) Plan has been terminated prevent the Target from allocating this accrued amount as a profit sharing contribution on behalf of participants up through the short plan year ending on the date of the plan's termination?. Buyer is fine with the amounts being used for this purpose but does not want to do anything that would jeopardize the status of the plan as having been terminated prior to closing for 401(k) Plan successor employer issues, etc. Thanks for any thoughts.

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One might be influenced by the terms of the termination amendment. If there are no applicable provisions, and one the thinks that the amendment is effective to cut off elective deferrals as of the specified date, how would one justify contributions of nonelective contributions? I don't think mere delivery of contributions, e.g. matching contributions, after the specified date is a problem if the contributions are provided for before the specified date.

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Target was acquired in a stock deal.

Past tense? Isn't the Target now a subsidiary of Buyer? Who thinks that Target gets to make this decision?

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QDRO, Thanks for your thoughts. That is largely where I am too but would be delighted for any support to the contrary.

David, Yes, Target is a subsidiary of Buyer now. As noted, Buyer is fine with use of the accrued amounts as profit sharing contribution and would like that to happen as would continuing management of Target so I think all parties are in agreement on what is desired. Hence the question on whether that can actually be done.

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I think it's absolutely ok to make a contribution "as of" a date on or prior to the termination date (and with Buyer and Target's agreement the termination could be undone and re-done for a later date if necessary). Later deposit of monies is no problem.

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If I were in 401(a) Chaos' shoes I would definitely research this in depth, and if I could not find anything specifically supporting it I wouldnt do it. I can't help thinking that a "termination" has no significance if contributions which weren't binding pre-termination can be made post-"termination."

I assume that employees of target are participating in buyer's plan. As an alternative fix, and assuming no 410b or 401a4 issues, why can't buyer amend its plan to provide for a special nonelective allocation for target's employees for this year?

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Bird, many thanks for your response. I guess our main concern is that we not do anything to jeopardize the terminated status of the Target's plan and definitely don't want to undo the termination as the Buyer has a strong preference for having the plan terminated and amounts distributed rather than merging Target's plan into Buyer's 401(k). (Long story.)

Jpod, you have put your finger on our main concerns here. Yes, the Target's employees are in Buyer's 401(k) going forward and I guess it might be possible to do something for them there but they are literally now just a handful of people in a huge company / plan so I'm not sure Buyer has much patience for special deals for them. Sort of one of those things that is fine if they can just drop some dollars into the Seller's plan before distributing / rollovers are done but not something they are looking to make a real project out of.

Thanks for all the responses thus far. We are continuing to research and search for any clear support per Jpod's recommendation but if anybody has anything that can shortcut that glad for the suggestions.

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How much money are you talking about for the target's employees? If it's not significant, one solution might be just to give it to them as a (taxable) bonus (it would have been fully vested anyway if contributed to the terminated plan.

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Thanks, Jpod. I think they're considering that. Amount involved is around $150,000. Not much in the aggregate but group is small so individual amounts would be fairly significant.

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Maybe some constructive use for the $150k can be found other than simply paying it out to them (or, for that matter, dumping it into a plan on a fully vested basis). For example, maybe it can be used to provide "stay bonuses" that are earned incrementally over a period of time that makes sense given the buyer's objectives vis a vis the target's employees. Maybe it can be used to provide a medical insurance premium holiday for a period of time (i.e., thereby converting taxable or tax-deferred dollars into tax-free dollars).

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I can only repeat/restate what I said - I can see no reason not to make a contribution as of a date on or before the plan termination date. If you think you can't then I would ask when it is ok? - I guess the implication is no contributions in the year of termination? Why not? Back when we used to submit for FDLs upon termination, there would often be contributions made for the year of termination and it was never questioned.

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Thanks, Jpod. Those are great ideas. I think Buyer would ideally prefer the amounts to be added as profit sharing contributions under the Target's plan because that is first choice of some of the key target employees that are still involved in management of the company.

I think Bird may be on to something here. We've done a fair bit of looking around, including the ERISA Outline Book, and (somewhat to my surprise) have not found anything squarely on point that says you cannot do it. Indeed, there seems to be some general support for the idea that as long as elective 401(k) deferrals for amounts earned after the termination date are not permitted the terminated plan might still be permitted to make a profit sharing contribution, etc.

Again, I don't think we have found anything that expressly says this is ok but our general read so far is that it seems more permissible than I imagined at first. Had the resolutions terminating the plan authorized or even signaled an intent to do the profit sharing contributions I would feel better about it but I guess I can see some basis for allowing this to happen now even though the plan has terminated. One thing that seems potentially helpful here is that the Plan is on a 9/30 PYE so now is typically the time of their contribution. The transaction did not close until late October so maybe that looks best to say that the contribution was for a PYE that occurred before termination? I am not sure.

I think we are leaning toward saying the conservative thing would be not to allocate since there was no clear action taken to approve the profit sharing amounts prior to plan termination; however, there appears to be a reasonable argument that this is permissible and would not jeopardize viewing the plan as terminated for 401(k) successor plan rule purposes, etc.

Thanks to all for your thoughts. Glad for any additional ones you may have.

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Could there be a problem doing a profit sharing allocation if the plan required employment on the last day of the plan year? Or, would the termination date set a new last day?

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Thanks Sully. In this case they were on a 9/30 plan year so we actually have a PYE before the termination and I don't think we have to parse the issue you raise but I think it could raise concerns.

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