Plan Merger after Asset Sale

[K-t-F]

Here are the simple facts:

-> Dental Practice is sold - asset sale - all employees stay at their positions

-> New owners take over the plan to keep a status quo ... so the employees can continue to defer and receive the SH match

The new owners adopted a new plan which is a mirror of the existing plan.  All employees are given credit for their service with previous company.  

They want to merge the old plan with the new plan.

Q - Do we need to, are we required to give the participants the option to take their money? Take a distribution? (or of course roll their accounts to the new plan)

Thanks

[JackS]

No option to take distributions becuase the new entity assumed sponsorship of the plan.  Curiously, why did they adopt a new plan also?  Once they took over the old plan, why did they feel the need for another?

 

[Bird]

17 minutes ago, K-t-F said:

Q - Do we need to, are we required to give the participants the option to take their money? Take a distribution? (or of course roll their accounts to the new plan)

A merger is an action taken by the employer(s) to combine two plans into one.  It's a continuation of the plans under one roof...no options for anything, including rollovers, are needed or permitted. 

9 minutes ago, JackS said:

Curiously, why did they adopt a new plan also?  Once they took over the old plan, why did they feel the need for another?

Good Q. 

[ESOP Guy]

Your question doesn't make sense to me.

The term "merge plans" mean they are moving the balances from the old plan to the new plan without giving the employees any choice.  The decision was made by the trustee and plan administrator to move the assets from old plan to new plan and the employees get no say in it.   

On the other hand if they are terminating the old plan and setting up a new plan the answer could be they need to give them an option to take a distribution.

So please clarify what is really happening here.  

Are they merging the plans and the employees have no say about it or is the old plan being terminated?  

[K-t-F]

What they want is for the plan to continue on as if nothing happened.   So let me get this straight...

Bob's Dental sells to Sue's Dental... asset sale

Sue's Dental can simply take over Bob's Dental 401(k)? 

 -> simply amend the plan by changing the plan sponsor? Changing the trustees?  Case closed?

 -> in the above scenario the participants don't have a choice.... plan just continues on as Sue's Dental wants?

If so then I am guilty of overthinking the whole case. 

 

[justanotheradmin]

19 minutes ago, K-t-F said:

Sue's Dental can simply take over Bob's Dental 401(k)? 

Yes.

19 minutes ago, K-t-F said:

 -> simply amend the plan by changing the plan sponsor? Changing the trustees?  Case closed?

Yes. 

20 minutes ago, K-t-F said:

 -> in the above scenario the participants don't have a choice.... plan just continues on as Sue's Dental wants?

Yes. 

This exact scenario happens all the time. 

Be aware that if a SH contribution is due to the former owner(s), the new sponsor is now required to pay it - I have had that come up where the new owner did not anticipate having to make large SH contributions to the two former owner's accounts because they paid themselves well for the part of the year that they owned the business / were employees. And the prospective plan sponsor might want to review the plan first and make sure everything is in good order before taking it on. Sometimes the business attorney helping with the asset purchase does that. 

[K-t-F]

Thanks for that !   No SH contribution issues... as a matter of fact they received like $1200 too much and they returned it already.  

question... The plan had it's own EIN.... Do we need to apply for a new plan EIN because the old owner (Bob's) was affiliated to that EIN and now Bob's is gone? 

[justanotheradmin]

The plan will need to file an 8822-B to update the information with the IRS. This will tell the IRS that the new employer is responsible for the plan (and it's EIN). 

[Larry Starr]

24 minutes ago, justanotheradmin said:

The plan will need to file an 8822-B to update the information with the IRS. This will tell the IRS that the new employer is responsible for the plan (and it's EIN). 

Which is saying that you don't get a new EIN for the plan; it is the SAME plan (thus, same EIN) but just a new sponsor.

[K-t-F]

Yup!  Thanks for all the help.  I have never run into this scenario.  Never had a business sell.  Plan sponsors die but that is just a termination.  

[K-t-F]

Ok... 8822-B completion question... I assume I only complete the following for a responsible party change?

#2     regarding "Employee plan returns 

#8     New Responsible Party's name  (new business officer)

#9     New responsible Party's EIN

#10   Officer signs

 

Thanks

[FormsRstillmylife]

If he did no due diligence on her ability as a financial investor, what is the fiduciary liability of Bob if Sue tanks the plan investments?   The take-over of the plan is not an automatic part as it would be in a stock sale.  It is a voluntary action of the plan fiduciaries.  Or, am I thinking about this incorrectly?

[Bird]

14 hours ago, FormsRstillmylife said:

If he did no due diligence on her ability as a financial investor, what is the fiduciary liability of Bob if Sue tanks the plan investments?   The take-over of the plan is not an automatic part as it would be in a stock sale.  It is a voluntary action of the plan fiduciaries.  Or, am I thinking about this incorrectly?

Interesting question, as the concern about risk usually runs the other way - that is, if Bob potentially mis-ran the plan, does Sue want to continue that plan or should the original plan be terminated and Sue starts a new one?  I think many in our industry are overcautious about such things and frankly, if I were running Bob's plan I'd have a hard time recommending the extra cost and hassle (and asset leakage) of terminating that plan and starting a new one (i.e. "I ran this plan but can't be sure it's ok"??!!).

Anyway, no, I don't think there is a risk to Bob if he sells the biz and Sue takes over his plan and messes it up.

[QP_Guy]

I had always understood that if there were an asset sale, then the employees would have a severance of employment with the oldco and a new hire date from newco.  (I think the same desk rule went away in 2000??)

Unless newco adopted the plan prior to purchasing oldco's assets (with the plan as an enumerated asset), that severance of employment would remain as a distributable event, wouldn't it?  And that distributable event would follow any plan merge, wouldn't it?

[EBECatty]

14 hours ago, QP_Guy said:

I had always understood that if there were an asset sale, then the employees would have a severance of employment with the oldco and a new hire date from newco.  (I think the same desk rule went away in 2000??)

Unless newco adopted the plan prior to purchasing oldco's assets (with the plan as an enumerated asset), that severance of employment would remain as a distributable event, wouldn't it?  And that distributable event would follow any plan merge, wouldn't it?

There is no severance from employment if the new employer assumes the old employer's plan. See 1.401(k)-1(d)(2):

(2) Rules applicable to distributions upon severance from employment. An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee's new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of section 414(l)) with respect to the employee.

[QP_Guy]

On 3/11/2020 at 5:11 AM, EBECatty said:

There is no severance from employment if the new employer assumes the old employer's plan. See 1.401(k)-1(d)(2):

(2) Rules applicable to distributions upon severance from employment. An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee's new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of section 414(l)) with respect to the employee.

So what is the standard?  I mentioned "unless newco adopted the plan prior to purchasing the assets": that would certainly avoid the severance.  I've advised including the plan as an 'enumerated asset' on the asset purchase contract.  that works.  But what if there is, for example, a one year delay between the newco's asset purchase and the newco's sponsorship of oldco's plan?  Does that satisfy the "in connection with a change" standard above?    A distributable event until there isn't? The original post doesn't mention the timing, that was my point, poorly made i guess.