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Competing 401(k) Safe Harbor Merger


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Brain Scramble time. An LLC taxed as C Corp acquires an LLC taxed as a partnership. That gives issue one. True or false - Since there is no stock in the LLC-P, it is my understanding that this has to be classified as an asset purchase. (see, I am in trouble already!)

It so happens all of the people in the LLC-P are on the payroll and are now contributing to the LLC-C 401(k) Plan because t he LLC-P is defunct. But wait, it gets better! The LLC-C agreed to take on the 3% non-elective Safe Harbor plan of LLC-P (which LLC-C had to become the sponsor), and so they want to merge the 3% SH plan into to LLC-C matching SH plan.

The 'plan to be merged away' not only has the 3% SH, but it has a different vesting schedule. It was also a spin-off from a PEO plan, but I do not think that presents any issues.

So we now have issue two - Current IRS thinking would require this merger to happen at the end of the year because there will be amendments to the LLC-C document to effectuate the merger mid-year - True or False.

I do not think the merger (and therefore termination) of the LLC-P plan presents a problem as the original sponsor is defunct, even though the LLC-C is the new plan sponsor.

If there is any official guidance I am always happy to learn. Thank you all.

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There is no official guidance on mergers of safe harbor plans. When asked, the IRS refused to comment. The normal standard in areas with no guidance is to use a reasonable, good faith interpretation of the code.

I'm not sure I completely follow your situation. If you are saying that contributions to the LLC-P 3% SH stopped when they became employees of LLC-C, 1.401(k)-3(e)(4)(ii) allows a short final SH plan year if the plan termination is in connection with a 410(b)(6)( C) transaction. With LLC-C now sponsoring the LLC-P plan, terminating the LLC-P plan is not a distributable event for the deferral and SH accounts. I think that will force you to transfer balances for the actives from the LLC-P plan into the LLC-C plan. As for timing, I think many would suggest a year end merger to avoid having to worry about any possible mid-year issues. While that is certainly the "safe" approach, I'm not convinced it is required.

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  • 3 months later...

I think I have a similar situation and would welcome any thoughts.

Parent corporation with a safe harbor 401(k) plan acquired another company in a stock deal earlier this year. The acquired company remains a separate, wholly owned subsidiary of parent and sponsors a safe harbor 401(k) plan. Companies plan to move the subsidiary employees over to parent company and parent company payroll effective July 1, 2016. (The transfer cannot be done 1/1/16 for a variety of reasons.) At the point the employees move over to parent, the subsidiary will be defunct and will likely be merged into the Parent but could remain as a shell if that would be helpful. In any event, the sub will no longer have employees participating in the safe harbor 401(k) and all the former employees will become employees of Parent and begin participating in parent's regular 401(k) plan.

Is this a situation where the safe harbor plan might effectively be terminated with the merger / transfer of the company and so permit a short plan year that would not jeopardize the safe harbor status from 1/1/16 through 6/30/16? Could the safe harbor plan be merged into the parent's regular 401(k) as of 7/1/16 without causing safe harbor issues?

Alternatively, could they simply keep the safe harbor plan in place through the end of 2016 and merge it into the parent 401(k) then. Seems there would not need to be any mid-year amendments to the safe harbor plan or any mid-year termination of the safe harbor plan with that approach to raise potential safe harbor concerns. While the safe harbor plan accounts could not be distributed until the plans were merged, that may be okay. I guess I just worry though that having the subsidiary merged away and/or all the active employees leave the company would be a deemed mid-year termination of the safe harbor plan or create other issues that could call safe harbor status into question for 2016.

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