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SH plan merging into non-SH plan mid-year


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Starting with the fact that 1.401(k)-5 is "reserved" so that there is not necessarily any clear guidance...

Let us assume that both plans operate on a calendar year basis. Let's further assume that both businesses are corporations. Say Corporation A has a SH 401(k) plan. Corporation B has a non-safe harbor 401(k) plan. Corporation B buys Corporation A's assets, and all of A's employees come to work for B. B wants to assume the assets and liabilities of A's plan, and merge A's plan into its own plan while still preserving the safe harbor status of A's plan for the year.

I'm not sure I see any way to do this. I think corporation A's plan could be TERMINATED, and thus preserve safe harbor status, but I don't see how it would work in a merger of the plans. Thoughts?

If instead it were a stock sale, I don't see that it alters the outcome. Thoughts?

(If B's plan were a safe harbor plan of the same type, then I think a good argument might be made that the plans could be merged while preserving safe harbor status, but that's another issue altogether.)

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All of A's employees are terminated w/r/t A and are new hires w/r/t B.  The A plan is a SH full of terminees, the B plan that includes the A employees is not a SH.  Contribution made by A employees to the B plan are part of the ADP test.  Presumably the B plan is amended to waive any service requirements that would otherwise apply to A.  

 

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Thanks. However, I'm not certain I necessarily understand what you are saying. Are you saying that the "A" SH plan in this situation retains safe harbor status, or not? Since the buyer is assuming the plan of the seller, there's no severance of employment/distribution event. I agree that service with A must be credited for B's plan, etc.

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So, what happens if B becomes the sponsor of Plan A and then terminates the plan?  1.401(k)-1(d)(4)(i) says the plan termination will not be a distributable event, since Plan B would be an alternative defined contribution plan of Company B.  With no distributable event, what happens to the balances of active participants?  The only option I can think of is to transfer (merge) their balances into the alternative defined contribution plan. You've already mentioned that Plan A can have a short final safe harbor year if it is terminated in connection with a 410(b)(6)(C) transaction [1.401(k)-3(e)(4)].  It would be nice if the IRS gave additional guidance on mergers.  But, existing regs get you close. Or, they can merge the plans at the end of the year.

 

 

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Thanks Kevin - good point. These aren't plans or businesses we have anything to do with - just trying to answer a question from a CPA who does some business with us, and we are operating on nearly zero information. It turns out, however, that the business sponsoring the SH plan already amended it to suspend SH contributions, so all of this is probably N/A. But good to remember the next time it comes up!

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If the purchase by B assumed sponsorship of A's SH plan, why not simply operate separately for the remainder of the year and use transition rules for coverage and NDT? Then merge plans at 1/1 with the surviving plan being the one with the provisions that aligns with the company's objectives.

If B did not take on sponsorship then A's plan should be terminated.

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Thanks. But, coverage was never the question - the question asked to us was preserving the safe harbor status. And given that it turns out that the plan was already amended to suspend safe harbor contributions, I don't see how SH status can be preserved.

Thanks to all for your responses.

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