Plan merger and final 5500 - 1/1 merger date

[Belgarath]

I know there has been some discussion on this before, including David Rigby's reference to a gray book question, which was very helpful, but I'd just like to confirm something.

So, Plan A merges into Plan B effective 1/1/2014 - that is the formal date on all merger documents. Question is, does Plan A have to file a final 5500 for the 2013 Plan Year, or for the 2014 Plan Year?

It seems like one could argue that the assets don't transfer to Plan B until 1/1, and are there in Plan A on the last day of the Plan Year, so the "final" form would be filed based on a short Plan Year beginning on 1/1 and also ending on 1/1. And it would therefore be due in 7 months, rather than the otherwise normal filing date.

Now, this seems ridiculous to me, and I'd argue that the filing for the prior 12/31 could be filed as a final form, showing zero assets on 12/31 (even though not "technically" true) and be done with it. But I've never seen this situation, and I wondered how the DOL might view this, since this is DOL and not IRS.

I'm just taking the temperature of folks here to see what they would do, or what they have seen/heard?

Thanks.

[Kevin C]

We typically merge existing plans on 12/31 to avoid the issue. We have had a couple of times where the receiving plan was a new plan established on 1/1, where we had the merger effective 1/1. In those cases, we filed a short year final 5500 for the 1 day final plan year.

That was before my recent experience with the IRS challenging a final 5500 for a small plan where everyone was paid in December, but one participant's payment was returned in January. The agent was going to force us to amend the 12/31 final return to show the funds returned and then file a final 5500 for the following year showing it distributed again. Fortunately, her manager got involved and overruled her. With the IRS working on two year old filings, it would have forced us into the DOL's delinquent filer program for the later return. Back to your question, I would rather spend a little extra time doing a 5500 for the one day year, than have a small risk of a significant non-billable headache later on if the IRS or DOL decides to question the filing.

[My 2 cents]

If a defined benefit plan terminates and distributes the assets near the end of the plan year and one of the checks is not presented for payment until the year after the assets were distributed, does that undermine filing the 5500 for the year in which all the distributions were issued as the final 5500, reducing the assets and participants to 0? If the participant claims to have lost the check and the prior check is stopped and a new one (same amount) issued?

Doesn't sending the check out constitute payment, with any subsequent actions being mere paperwork?

[Belgarath]

Thanks Kevin. Sigh..that was what I was coming around to after thinking about it following the posting. Truly, it doesn't matter to me in this case, since prior TPA is responsible for the filing, but I was thinking about it in case it ever comes up with us. What a ridiculous waste of effort. This plan wasn't subject to audit, but I haven't looked into whether an audit would be required for such a 1-day plan year in the event it ever comes up on a plan subject to audit. And I probably won't bother, since (hopefully) by the time such a real life situation occurs, I'll either be retired or they will have changed the rules!

Thanks again.

[Kevin C]

If the plan was audit size, you could use the rule for plan years less than 7 months and file a combined audit for the last full year and the one day plan year with the final filing.

[Belgarath]

Hmmm - what if the audit was already done and filed with the 2013 forms? Can the 2014 1-day plan year form be filed with the same audit re-attached? Again, this is idle curiosity as not our problem and not subject to audit anyway - so idle that I'm too lazy to look it up, so please don't waste any time on this!

[Kevin C]

The normal way would have been to mark the 2013 return indicating that an audit is not attached because it will be attached to the 2014 return. Then, the audit attached to the 2014 return would be for the period 1/1/2013-1/1/2014. This exception is described in the 5500 instructions. I don't recall if it had enough flexibility to do what you are thinking about.

You could amend the 2013 return and refile it without an audit, get the audit modified to cover one more day and file it with the final 2014 return. But, I would compare the cost of that versus having a one day audit done.

[rcline46]

Why audit - in this situation, the opening participants is likely to be way under 100 - like 1 or 2, so no audit.

[chc93]

Why audit - in this situation, the opening participants is likely to be way under 100 - like 1 or 2, so no audit.

I thought of this too. If the effective date of the merger is 1/1/2014, how many participants were there on 1/1/2014? If zero, then no audit. But still need a final 5500 for 2014. Also, I think the dates on the 2014 5500 would be 1/1/2014 - 1/31/2014 (somewhere, I thought I heard/read that the ending date on the 5500 has to be the last day of a month, but I may recall incorrectly).

[Bill Presson]

Why audit - in this situation, the opening participants is likely to be way under 100 - like 1 or 2, so no audit.

Why audit - in this situation, the opening participants is likely to be way under 100 - like 1 or 2, so no audit.

I thought of this too. If the effective date of the merger is 1/1/2014, how many participants were there on 1/1/2014? If zero, then no audit. But still need a final 5500 for 2014. Also, I think the dates on the 2014 5500 would be 1/1/2014 - 1/31/2014 (somewhere, I thought I heard/read that the ending date on the 5500 has to be the last day of a month, but I may recall incorrectly).

If it's a merger, it's probably likely that no one has been paid out. Why merge a plan that has distributed everything?

[Francis]

Have there been any updates to procedures on the topic of a plan merging Jan. 1st and whether the 5500 for the previous year could be the last one and marked as final?

Two plans merged 1/1/22 on paper, and all assets moved from the sending plan 1/4/22 (first business day of the year). The account statements for the sending plan show the entire plan balance intact on 12/31/21. Since the merger date was 1/1/22 and no assets moved until 1/4/22, is there any reasonable way to mark the 5500 for 2021 as final and not file a 5500 for 2022?

[Paul I]

The final 5500 must show an ending balance with zero assets.  Completing the 5500 for 2022 would seem to be trivial unless an audit is required.

Check the filing deadline.  The date the assets go to zero ends the plan year.

[MoJo]

12 hours ago, Paul I said:

The final 5500 must show an ending balance with zero assets.  Completing the 5500 for 2022 would seem to be trivial unless an audit is required.

Check the filing deadline.  The date the assets go to zero ends the plan year.

Easier said than done.  We routinely "merge plans" without merging assets which takes some time.  "Zero balance" occurs when the assets are "deemed" to now be part of the surviving plan, despite still being held in a trust account established by the former plan.  We always spell out in merger documents that the plan is deemed merged precisely at midnight.  Arguably then, the disappearing plan has a zero balance at that point, and has a final 5500 for the prior year, and the new plan has assets transferred in as of the subsequent year.  An artifice for convenience?  Darn tootin'.  But absent guidance, a defensible position.  Merger lawyers (all but the best) don't seem to understand this....

[Bird]

1 hour ago, MoJo said:

Easier said than done.  We routinely "merge plans" without merging assets which takes some time.  "Zero balance" occurs when the assets are "deemed" to now be part of the surviving plan, despite still being held in a trust account established by the former plan.  We always spell out in merger documents that the plan is deemed merged precisely at midnight.  Arguably then, the disappearing plan has a zero balance at that point, and has a final 5500 for the prior year, and the new plan has assets transferred in as of the subsequent year.  An artifice for convenience?  Darn tootin'.  But absent guidance, a defensible position.  Merger lawyers (all but the best) don't seem to understand this....

Perfectly stated. I would add that this means that a 12/31/22 merger date means a final return for 2022 (regardless or where the assets physically resided). A 1/1/23 merger date means a final return for 2023. (We would generally use 12/31 to avoid an additional return.)

[Peter Gulia]

Recognizing MoJo’s guidance, there sometimes might be a deliberate variation from the mainstream approach of setting a plans’ merger’s effect for a year-turn.

A receiving plan’s sponsor/administrator might prefer that a merger not happen by midnight December 31 because that might increase the receiving plan’s beginning-of-year count of participants to require engaging an independent qualified public accountant when the receiving plan’s administrator otherwise would not engage an IQPA. Instead, one might set the plans’ merger for the first business day of January.

[MoJo]

11 minutes ago, Peter Gulia said:

Recognizing MoJo’s guidance, there sometimes might be a deliberate variation from the mainstream approach of setting a plans’ merger’s effect for a year-turn.

A receiving plan’s sponsor/administrator might prefer that a merger not happen by midnight December 31 because that might increase the receiving plan’s beginning-of-year count of participants to require engaging an independent qualified public accountant when the receiving plan’s administrator otherwise would not engage an IQPA. Instead, one might set the plans’ merger for the first business day of January.

Always a balancing act, but enrolling newly acquired participants is often totally independent of merging the plans.  Often, newly acquired employees enter the plan (old plan frozen, new plan offering participation) after the close of the deal, but before the merger of the plans (under the direction of the acquirer who acquires the plan as part of the deal - our preference, BTW, lest the acquirer acquires a bunch of new employees with brand new pickups and bass boats, but no retirement savings).  Every deal is different.  Details matter (amazing how many times people forget to freeze the old plan resulting in eligibility continuing, and "missed deferral opportunity corrections resulting in a windfall for those employees).  The  key (and the biggest challenge) is ensuring the benefits professionals get involved early enough when the plan sponsor(s) have more options....

[Paul I]

The artifice for convenience needs to be in sync with the reporting.  Filing a 5500 with the final return box checked and with a balance on the Schedule H or I is an edit check that can trigger an inquiry.  We have seen the merger agreements with the date and time of the plan merger set specifically at 11:59pm on 12/31.  Some agreements take extra care to note explicitly that the ownership of the trust assets for the plan merging in also is effective as of that time and date.

In real-world trust reporting, the trust statements very likely will show assets as of COB 12/31 for the plan being merged.  If the trustee is also associated with the recordkeeper that is preparing the 5500, the draft 5500 likely will show those assets as the ending balance and will not have the final return box checked.  The trust reporting will not show a zero balance until the assets leave the account. 

So, yes, easier said than done and a balancing act.  We had to involve an agent's supervisor to overrule an agent's refusal to accept that the merger was consummated as of the effective date of the merger even though there was a trust report that showed a balance in the name of the merging plan.

All too often merger agreements are done with considering the implications on the plan, and the client's benefits staff and the plan's service provider only learn about the merger until after it is too late to provide input.  For smaller plans, it is far easier and less time consuming to go with the flow and file a 5500 that covers the days into the next plan year when the trust reporting in the name of the merging plan will show a zero balance.

[Peter Gulia]

 

28 minutes ago, MoJo said:

The  key (and the biggest challenge) is ensuring the benefits professionals get involved early enough when the plan sponsor(s) have more options....

Some law firms keep an employee-benefits lawyer busy working on the deals the business lawyers work on.

For firms that lack an eb lawyer, good lawyers sometimes won’t work a deal unless the client engages (or authorizes the deal firm to engage at the client’s expense) a suitable employee-benefits lawyer.

[MoJo]

43 minutes ago, Peter Gulia said:

 

Some law firms keep an employee-benefits lawyer busy working on the deals the business lawyers work on.

For firms that lack an eb lawyer, good lawyers sometimes won’t work a deal unless the client engages (or authorizes the deal firm to engage at the client’s expense) a suitable employee-benefits lawyer.

You're qualifiers here are that 1) a law firm is involved (with some depth/breadth in various areas); and 2) a "good" (M&A) lawyer is involved.  We deal with 50-100 clients doing some sort of corporate transaction per year (many doing more than one), and half or more have a solo general practitioner handling the deal.  In many cases, it's a "handshake (literally) and we find out after the fact.  Just sayin - reality is what it is....

Even firms with an EB practice, it is often the case that the lawyer doesn't understand the details of how something actually happens (and on more than one occasion have asked us who will be available at midnight to receive the assets being transferred), and details like when is the plan zeroed out for 5500 purposes.  We often deal with attorneys who claim the old plan isn't done until assets transfer (until we point out you can have separate custodians and even separate trustees for different parts of the same plan) if the documents are set up correctly before it happens.  Always fun...  My secret weapons is I have on my staff an ERISA attorney who used to work for LTV Steel (and various other names it went by before and after) who worked with 170 or so acquisitions, numerous spin-offs dispositions, two major bankruptcies, and twice was in-house counsel for cases that went to the SCOTUS with respect to retirement plan issues. And she shakes her head at things some of our clients do.....

[Peter Gulia]

Yes, we're agreeing; we can help only those who are alert, competent, and want to be helped.

[MoJo]

56 minutes ago, Peter Gulia said:

Yes, we're agreeing; we can help only those who are alert, competent, and want to be helped.

And in many ways, the lack thereof is what keeps me employed!