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Sale of dental practice without plan termination


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I have a client who sold his dental practice in September but is continuing on with his Corporation for two more years in order to fully accrue his benefits in a defined benefit plan. This client also maintains a cross tested safe harbor 401(k) Plan and an additional straight comp to comp Profit Sharing Plan.

Now that we are at the end of the year I am not sure how to allocate benefits. All active employees (except for one who terminated a few days prior to the sale) continued employment with the new owner so they all have the same termination date with my client. At the very least we have a partial termination and everyone is 100% vested. That is the straightforward part.....

Now for the tough part....the 401(k) Plan has a last day of the year rule along with 1000 hours in order to get a contribution. Is there any way to justify allocating a contribution to all employees employed on the date of the sale? If I do that then I guess I would also need to prorate the hours requirement for the "short" plan year. There is no fail/safe for 410(b) since we aggregate all three Plans for testing with the general test.

The Profit Sharing Plan and the DB Plan do not have a last day of the year rule so they do not really present a problem. However, if I allocate a contribution to employees in the 401(k) Plan using the "short" plan year theory then I guess I would simply prorate hours in the PSP and DB Plan in order to determine who is eligible for benefits.

Also, the Plans are Top Heavy (of course) so should I be concerned with providing top heavy for all employed on the date of the sale.

Does anyone have any suggestions!

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I don't know much about the issue, but, I have to wonder why the sale is of concern. You stated that the dental practice was a Corporation. The sale was a sale of the ownership of the stock certificates, so all that happened was a change of ownership.

What does this have to do with the continuation of the Plans?

You also mentioned that ".... we have a partial termination.... ". Why ?

Why do you have a "short" plan year?

I do not see the relevance of being "employed on the date of the sale".

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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You need to have your client talk this his ERISA attorney in my mind. Many of your questions should have been answered in a plan amendment. It sounds like your client didn't really think through the sale and what he wanted to do with the plan. Otherwise this questions would have been asked back when the sale was be thought about.

However, if there is no other answers then I would say the last day language stands and people can't get an allocation because of it. Because of coverage and TH the owner might not be able to get allocations. I would have to think about it.

In the end this is a lesson in the need for better planning. I know that might not help you much now as you might have not found out about the sale until after the year end and so forth.

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I would guess that the owner is still employed by his corporation. After all, he "...is continuing on with his Corporation for two more years in order to fully accrue his benefits in a defined benefit plan." How is he accruing benefits if not employed?

So he's entitled to a contribution, and you fail the 410(b) coverage test, and either have failsafe language to fix it or have to do an amendment to fix it. It might have been better to tidy up the language ahead of time but it seems fixable to me.

Ed Snyder

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Think through this and I think you'll be able to get to the right answers.

1. Dr kept the corporation but sold assets. It's really not any different than selling the physical parts.

2. Corporation continues because Dr didn't sell stock.

3. Plans continue because the corporation is still the sponsor. No plan year change.

4. All employees, other than Dr terminated in September.

5. So now you look at the allocation rules for each plan. DB & PS have no last day rule, so continue as normal.

6. You say the 401(k) has a last day rule, but usually that is for the PS component and you also say he has a PS plan. Not sure of what's really going on. But if he has a last day rule, the terminated ees aren't eligible. But if he's getting a contribution, then you fail 410(b). Either fix it according to how the plan requires (if in document) or do an -11g amendment which would allow you to allocate to all the terminated people if desired.

Does that help?


William C. Presson, ERPA, QPA, QKA
C 205.994.4070
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Thanks everyone for your input. I can pass the general test by giving the NHCE's in the PSP contributions since this Plan does not have a last day requirement. I was just hoping to provide the employees in the 401(k) Plan more than the safe harbor and gateway minimums since these are the employees the Doc wanted to benefit most.

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