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Forced rollovers to separate retirement


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Not exactly what you describe, but I have seen plan provisions and communications by which a terminating plan’s final distribution results in a default direct rollover to the next employer’s plan if the participant has not by a specified due date after a reasonable time delivered her instruction to be paid money or for a direct rollover to another eligible retirement plan.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Did buyer adopt the plan?  Maybe it's neither a "mass rollover" nor a "transfer".

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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You describe an asset purchase. With an asset purchase the form of subsequent movement from the plan depends upon, as David noted, whether the purchaser adopted the seller's plan. If the purchaser did not adopt the sellers plan you have a situation where the employees of the seller have had a separation from service with the seller and have the same rights that any participant would have in that case. They cannot be forced to roll the money to the buyers plan. As separated participants they have the right to take lump sum distributions directly (no rollover) or to roll the funds somewhere else.

If the buyer adopted the sellers plan you have a very different circumstance. Since the buyer maintains another qualified plan (I assume a 401(k) plan), that plan is now what is referred to as a successor plan. That leaves the buyer with several options 1) Operate the plan as is for the "grace period" provided for in the regulations, 2) freeze the plan, 3) terminate the plan, or 4) merge the plan into their existing plan (or a combination of #1 and #2). Since a successor plan exists, regulations do not allow distributions of qualified money (i.e. deferrals, QNECs, QMACs) for a period of 12 months from the plan originally sponsored by the seller.

Sorry, I probably gave you more than you wanted but the bottom line is that there is no such thing as a forced rollover (except cash outs of balances below $5,000).

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14 hours ago, Peter Gulia said:

Not exactly what you describe, but I have seen plan provisions and communications by which a terminating plan’s final distribution results in a default direct rollover to the next employer’s plan if the participant has not by a specified due date after a reasonable time delivered her instruction to be paid money or for a direct rollover to another eligible retirement plan.

So, if the 402(f) notices were drafted in such a way, then such an occurrence is feasible. Let me add one more wrinkle, the plan requires spousal consent due to it being a money purchase. Would obtaining spousal consent block such an effort if terminated participants (who may or may not be married) didn't respond or could those amounts still be forced to rollover to the other plan?

 

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3 hours ago, Purplemandinga said:

The plan will be terminated, the purchaser sponsors their own 401(k) (non-money purchase) plan. Employees will transfer to new employer due to purchase.

Well, I'll just answer your initial question then and say no.

OK, I'll add that it sounds like someone doesn't know what they are doing, and is treading on dangerous ground.  We just dealt with a big-box provider that didn't know the difference between a termination and a merger.

Ed Snyder

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3 hours ago, Bird said:

Well, I'll just answer your initial question then and say no.

OK, I'll add that it sounds like someone doesn't know what they are doing, and is treading on dangerous ground.  We just dealt with a big-box provider that didn't know the difference between a termination and a merger.

This is an asset transfer though. Not an equity purchase. There will be a "severance of employment". The two employers are not part of the same related group.

Also,

21 hours ago, Peter Gulia said:

Not exactly what you describe, but I have seen plan provisions and communications by which a terminating plan’s final distribution results in a default direct rollover to the next employer’s plan if the participant has not by a specified due date after a reasonable time delivered her instruction to be paid money or for a direct rollover to another eligible retirement plan.

Peter I didn't mean to suggest you were suggesting this was feasible in my prior comment. I have a bad habit of suggesting your comments say more than they do. I need to be more careful, I do apologize good sir.

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A final housekeeping comment that may or may not be helpful. Since the transaction was an asset sale, the selling entity likely still exists. As long as the buyer did not adopt the plan, it is the responsibility of the seller to initiate the termination, and the costs and administrative headaches, that go with it.

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16 hours ago, Purplemandinga said:

This is an asset transfer though. Not an equity purchase. There will be a "severance of employment". The two employers are not part of the same related group.

Nothing in that statement changes anything I said.  I'll spell it out:

They could merge the plans, in which case no one has any rights to a distribution, except due to termination of employment (i.e. it is not a plan termination).  The new plan would have to retain the annuity provisions on the old money.  They probably don't want to do that.

They could terminate the plan, in which case everyone has rights to distributions, but they don't get to roll over any unresponsive accounts, at least in my opinion.  If they did somehow finagle this into a combo termination/merger, and I have never seen it, they would have to retain the annuity provisions on the old money.  

Ed Snyder

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1 hour ago, Bird said:

Nothing in that statement changes anything I said.  I'll spell it out:

They could merge the plans, in which case no one has any rights to a distribution, except due to termination of employment (i.e. it is not a plan termination).  The new plan would have to retain the annuity provisions on the old money.  They probably don't want to do that.

They could terminate the plan, in which case everyone has rights to distributions, but they don't get to roll over any unresponsive accounts, at least in my opinion.  If they did somehow finagle this into a combo termination/merger, and I have never seen it, they would have to retain the annuity provisions on the old money.  

Bird, I believe I misunderstood you originally. I think you and I are on the same page my friend. Thank you for your help!

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Purplemandinga, no worries.  You recognized the idea I observed.  I wasn’t offended by your follow-up query to discern the reasoning of the idea.  But you also saw I didn’t express a view about whether the idea is legally sufficient.  My post was merely an effort to describe one possibility about what someone might have perceived as a “forced” rollover.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 2/22/2021 at 3:52 PM, Peter Gulia said:

Not exactly what you describe, but I have seen plan provisions and communications by which a terminating plan’s final distribution results in a default direct rollover to the next employer’s plan if the participant has not by a specified due date after a reasonable time delivered her instruction to be paid money or for a direct rollover to another eligible retirement plan.

 I'll ask on this post as the OP may also be interested in this.... 

FAB 2014-01 indicates for nonresponsive participants the IRA distribution is the "preferred" method and states two "Alternative methods" (Federally insured bank or State Unclaimed Property).  It also seems(to me) to provide a bit of latitude in language of "FAB 2014-01-- If a plan fiduciary cannot find an individual retirement plan provider to accept a direct rollover distribution for a missing participant or determines not to make a rollover distribution for some other compelling reason based on the particular facts and circumstances" (italics are mine).  

 I'm involved in a plan termination with 20 participants who are becoming employees at the acquiring company and 5 participants (former employees) not becoming employees at the new company.   As a method of "mass transfer" for those who do not timely respond to the normal and appropriate plan term distribution paperwork process (non-responsive), can the trustee default direct rollover the 20 to the acquiring company plan and the remaining 5 to outside rollover IRA's?  This could simplify the transfer request workflow for most of the 20 who just want to rollover to the acquiring company's 401k plan. 

As the terminating plan advisor(who is not chasing the IRA assets nor benefitting from the plan to plan transfer option), I can see this as an equal or better option (and certainly not worse) than transferring to a default IRA.  The acquiring company plan also allows "in-service distribution of rollover assets".  

Is a trustee deciding to default nonresponsive participants to the acquiring company's plan based on simplicity of transfer and very low plan cost in the new plan "compelling" based on the particular facts and circumstances?  How much of a "gray area subject to scrutiny" is this?

Thank you in advance for your thoughts. 

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On 2/27/2021 at 1:50 PM, Planit 401k said:

Thank you in advance for your thoughts.

The terminating plan is a money purchase plan.  Would you advocate forced rollovers from a DB plan to a 401(k)?

Ed Snyder

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Bird- I had seen it, but I forgot to remember the original posters situation was a Money Purchase.    Thank you for the correction. 

Purple--  You are correct, I was referencing a 401k to 401k (not including your MPPP situation) and thank you for the information.  

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