Successor Plan Issue

[ERISA-Bubs]

There are two entities -- A and B -- in a controlled group together.  Each have their own 401(k).  We want to eliminate B's plan at the end of the year, but over the course of the next few months, we are going to have a bunch of B employees moving over to A and they will be immediately eligible for A's plan.  So, we are going to violate the 2% rule under the successor plan rule because at least 2% of the participants in the B plan will have participated in the A plan in the 12 months leading up to terminating the B plan.

Is there a way we can spin off the accounts in the B plan of the people we expect to transfer to the A plan?  That way we'd have B1 holding those accounts and B2 holding the other accounts.  At the end of the year, we can terminate B2 without any successor plan issues, and merge B1 into the A plan.  Any thoughts or issues?

[david rigby]

Merge the plans?

[ERISA-Bubs]

As usual, it's a bit more complicated than that.  B is going to be merged into a separate company, so we want to spin off the accounts of people transferring to A before the merger, and then terminate the remaining B2 plan before the merger happens (it's a stock transaction).

[Larry Starr]

3 hours ago, ERISA-Bubs said:

There are two entities -- A and B -- in a controlled group together.  Each have their own 401(k).  We want to eliminate B's plan at the end of the year, but over the course of the next few months, we are going to have a bunch of B employees moving over to A and they will be immediately eligible for A's plan.  So, we are going to violate the 2% rule under the successor plan rule because at least 2% of the participants in the B plan will have participated in the A plan in the 12 months leading up to terminating the B plan.

Is there a way we can spin off the accounts in the B plan of the people we expect to transfer to the A plan?  That way we'd have B1 holding those accounts and B2 holding the other accounts.  At the end of the year, we can terminate B2 without any successor plan issues, and merge B1 into the A plan.  Any thoughts or issues?

Perhaps I'm missing something, but where is a successor plan issue?  You are going to merge Company B into a new Company C; is that Company C in a controlled group with A? Successor plan rules apply when the plan is being maintained by the SAME employer. Do you have that in this situation? Assuming no controlled group with C, the people in B moving to A can have their account transferred by an amendment providing for same.  Then, at the end of the year, you terminate plan B and pay everyone out.  Where is the successor plan?  What am I missing?

[ERISA-Bubs]

1 hour ago, Larry Starr said:

Perhaps I'm missing something, but where is a successor plan issue?  You are going to merge Company B into a new Company C; is that Company C in a controlled group with A? Successor plan rules apply when the plan is being maintained by the SAME employer. Do you have that in this situation? Assuming no controlled group with C, the people in B moving to A can have their account transferred by an amendment providing for same.  Then, at the end of the year, you terminate plan B and pay everyone out.  Where is the successor plan?  What am I missing?

Larry -

That's pretty much what I'm asking if I can do.  I was only asking about a spin off because I didn't realize you could just do an amendment to transfer an account to a new plan -- do you amend both plans?  Do you know if there is legal precedent for this?

My concern is, it seems like a very easy way to get around the 2% rule.  It seems fishy that you can just move those people out of the plan and then terminate it when the successor plan rules seem to be designed to stop employers from terminating and paying out a plan when more than 2% of them have, do, or will participate in another employer plan (w/in 12 months).  Is there some reason I shouldn't be concerned that if feels like I'm violating the purpose of the law?

[Larry Starr]

On 9/24/2019 at 8:13 PM, ERISA-Bubs said:

Larry -

That's pretty much what I'm asking if I can do.  I was only asking about a spin off because I didn't realize you could just do an amendment to transfer an account to a new plan -- do you amend both plans?  Do you know if there is legal precedent for this?

My concern is, it seems like a very easy way to get around the 2% rule.  It seems fishy that you can just move those people out of the plan and then terminate it when the successor plan rules seem to be designed to stop employers from terminating and paying out a plan when more than 2% of them have, do, or will participate in another employer plan (w/in 12 months).  Is there some reason I shouldn't be concerned that if feels like I'm violating the purpose of the law?

I still don't see a successor plan issue, and that is the key.  The "new plan" is not a successor plan because is it NOT a plan of the existing employer (or controlled group).  The successor plan rules are to prevent the payout when the employees will move to another plan (within 12 months) of the employer who is doing the payout; that is not your situation.

I would want to see the documents and fully understand the transaction before deciding exactly how to do the amendments, but it sounds like an amendment to Plan B to merge/transfer the accounts of those employees moving to Plan A (another member of the controlled group) should be fine, which leaves in Plan B just those employees who will be moving to Company C. At that point, rather than terminating B, why not merge it into C?

You are not getting around the 2% rule. First, if you do it my way, no one is getting paid out. But even if you terminate plan B after the transfer of those employee accounts moving to Plan A and pay them out (and do not merge it into Company C plan), they are not moving into a plan of the "employer" because it needs to be the SAME EMPLOYER; Company C is a different employer.

I don't think you should feel like you are violating the rules; I don't see that you are in any way violating even the spirit of the law.

Now, does anyone think otherwise?  Does anyone think there really is a successor plan issue?

[ERISA-Bubs]

On 9/25/2019 at 11:41 AM, Larry Starr said:

I still don't see a successor plan issue, and that is the key.  The "new plan" is not a successor plan because is it NOT a plan of the existing employer (or controlled group).  The successor plan rules are to prevent the payout when the employees will move to another plan (within 12 months) of the employer who is doing the payout; that is not your situation.

I would want to see the documents and fully understand the transaction before deciding exactly how to do the amendments, but it sounds like an amendment to Plan B to merge/transfer the accounts of those employees moving to Plan A (another member of the controlled group) should be fine, which leaves in Plan B just those employees who will be moving to Company C. At that point, rather than terminating B, why not merge it into C?

You are not getting around the 2% rule. First, if you do it my way, no one is getting paid out. But even if you terminate plan B after the transfer of those employee accounts moving to Plan A and pay them out (and do not merge it into Company C plan), they are not moving into a plan of the "employer" because it needs to be the SAME EMPLOYER; Company C is a different employer.

I don't think you should feel like you are violating the rules; I don't see that you are in any way violating even the spirit of the law.

Now, does anyone think otherwise?  Does anyone think there really is a successor plan issue?

  

The buyer is demanding the plan be terminated, so your way isn't an option.  

Here is how I see it.  If we didn't transfer B employees into the A plan before terminating the B plan, we have a successor plan issue.  At least 2% of the employees in the B plan will be in the A plan by the end of the year, so if we terminate the B plan at that time, the A plan is a successor, and we can't terminate and pay out the B plan.  That C isn't related is not relevant at this point.  I'm not worried about the C plan being a successor.

If we take all the employees who will be transferred from B to A out of the B plan (and put them in the A plan), at the time we terminate the B plan there are no B employees also participating in the A plan, so we get around the 2% rule.  That makes me uncomfortable.  If that really works -- and I'm not saying it doesn't -- couldn't every employer do that every time to avoid a successor plan issue?  

[Larry Starr]

25 minutes ago, ERISA-Bubs said:

The buyer is demanding the plan be terminated, so your way isn't an option.  

Here is how I see it.  If we didn't transfer B employees into the A plan before terminating the B plan, we have a successor plan issue.  At least 2% of the employees in the B plan will be in the A plan by the end of the year, so if we terminate the B plan at that time, the A plan is a successor, and we can't terminate and pay out the B plan.  That C isn't related is not relevant at this point.  I'm not worried about the C plan being a successor.

If we take all the employees who will be transferred from B to A out of the B plan (and put them in the A plan), at the time we terminate the B plan there are no B employees also participating in the A plan, so we get around the 2% rule.  That makes me uncomfortable.  If that really works -- and I'm not saying it doesn't -- couldn't every employer do that every time to avoid a successor plan issue?  

My way is still an option; what the buyer is demanding is that the B plan "go away".  That can happen by merging it into the A plan (all the participants are now in the A plan, so B is gone) and then treating those employees who leave the controlled group (aren't working for A or B) as terminated employees and pay them out. You can do the merger as of 12/31 if you want (and the employees who moved sooner just won't have their existing money follow them into the A plan until the merger is done at the end of the year). What's wrong with that? 

[ERISA-Bubs]

49 minutes ago, Larry Starr said:

My way is still an option; what the buyer is demanding is that the B plan "go away".  That can happen by merging it into the A plan (all the participants are now in the A plan, so B is gone) and then treating those employees who leave the controlled group (aren't working for A or B) as terminated employees and pay them out. You can do the merger as of 12/31 if you want (and the employees who moved sooner just won't have their existing money follow them into the A plan until the merger is done at the end of the year). What's wrong with that? 

For whatever reasons, the client doesn't want to merge the plans.  So, I'm not so much looking for alternate solutions as much as verifying whether my solution is kosher under the successor plan rules.  

You answer brings up a question, though.  If you treat them as terminated employees, they are eligible for distributions, but we can't make them take a distribution, right?

[Larry Starr]

19 hours ago, ERISA-Bubs said:

For whatever reasons, the client doesn't want to merge the plans.  So, I'm not so much looking for alternate solutions as much as verifying whether my solution is kosher under the successor plan rules.  

You answer brings up a question, though.  If you treat them as terminated employees, they are eligible for distributions, but we can't make them take a distribution, right?

Funny, when you say something like "for whatever reasons, the client doesn't want....", I take that as a definite requirement to find out what those reasons are! I consider it my  job to be his advisor; he tells me what he wants to accomplish (and "not merging the plans" is not an objective; something else is what he wants to accomplish) and I figure out the best way to do it.  In this case, based on all our discussion, if this were my client, he would be merging the plans (unless you have more info on WHY he doesn't want to merge, and that information makes sense).  In my scenario, the end result of the merger seems to be exactly what I think you have said that all the parties want to accomplish.  Why wouldn't they do it that way?

As to your additional question, if they ARE terminated employees in a plan (not just "treating them" that way), then all the rules apply.  If over $5,000, no forced payouts until NRA (see what the plan language says, of course).

[ERISA-Bubs]

3 hours ago, Larry Starr said:

Funny, when you say something like "for whatever reasons, the client doesn't want....", I take that as a definite requirement to find out what those reasons are! I consider it my  job to be his advisor; he tells me what he wants to accomplish (and "not merging the plans" is not an objective; something else is what he wants to accomplish) and I figure out the best way to do it.  In this case, based on all our discussion, if this were my client, he would be merging the plans (unless you have more info on WHY he doesn't want to merge, and that information makes sense).  In my scenario, the end result of the merger seems to be exactly what I think you have said that all the parties want to accomplish.  Why wouldn't they do it that way?

As to your additional question, if they ARE terminated employees in a plan (not just "treating them" that way), then all the rules apply.  If over $5,000, no forced payouts until NRA (see what the plan language says, of course).

That's very fair.  I actually do know the reason, I'm just not wanting to disclose more than is necessary, since my question is limited to whether transferring participants out of a plan into a would-be successor plan to avoid the 2% threshold would be problematic.  I really appreciate your input on all this.  Thank you.