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EBECatty

409A Plan Termination Following Change in Control

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Say Employer 1 sponsors a typical NQDC account balance plan with salary deferrals and potential employer matches/contributions. A handful of executives are eligible and participate.

Employer 1 undergoes a change in control through merger into Employer 2 or by becoming a wholly owned sub of Employer 2. Employer 2 sponsors a similar NQDC account balance plan with salary deferrals and employer money.

Employer 1's plan is not terminated prior to the change in control. Employer 2 would like to terminate after the change in control (but within 12 months) and liquidate the plan balances in Employer 1's plan. The executives eligible for Employer 1's plan will then become eligible for Employer 2's plan.

The post-CIC termination regulations define the service recipient as the post-CIC employer/controlled group. They also say all plans of the post-CIC service recipient group that would be aggregated if the same person participated must also be terminated. However, the rule only applies to people actually affected by the CIC (Employer 1's employees).

Post-CIC, Employer 1's and Employer 2's plans would be aggregated if Employer 1's employees participated in Employer 2's plan.

I'm unclear on how you aggregate here: Does Employer 2's plan have to be terminated as liquidated as well?

Even if the rule only applies to people actually impacted by the CIC (all Employer 1 employees) the two plans would still be aggregated and the regulation seems to require termination of all post-CIC aggregated plans.

If that's the case, do you simply have to freeze Employer 2's plan and let it pay out over time?

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The regs for plan termination and liquidation under 1.409A-3(j)(4)(ix)(B) permit the termination and liquidation of plans pursuant to change in control "with respect to each participant who experienced the change in control event". The plan aggregation rules would only apply to the Employer 1 plans. The Employer 2 employees should not be affected by the termination of the Employer 1 plans.

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Thanks XTitan. Maybe I'm being dense, or misunderstanding the regulation, but I think that only gets me halfway there.

Employer 2's employees won't be affected because they did not undergo a change in control. However, considering the post-CIC service recipient (say it's a merger so Employers 1 and 2 are now the same entity) as the service recipient for aggregation purposes, wouldn't Employer 2's plan have to be terminated because it would be aggregated with Employer 1's plan if Employer 1's employees participated in Employer 2's plan?

Or are you reading the term "with respect to each participant" as saying the "plan" to be aggregated is the individual participant's "plan"?

Appreciate your feedback.

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