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Asset Sale -Plan Termination


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Client selling the assets of his company, effective 6/5/2022; all employees will be terminated, employee contributions cease as of that date.

Employer has yet to make the 3% safe harbor (always made after the end of the plan year), so the plan must stay open to receive those contributions. 

The buyer maintains a 401(k) to which all participants in seller plan will rollover, but the plan has a 60 day eligibility requirement,

Can't the seller's plan remain open for those 60 days??

One participant has an outstanding loan, to which no further payments can be made after the participant terminates.  The outstanding loan balance is a QPLO which can be rolled over, can't it just sit in the seller's plan until expiration of the 60 days?

The solution would be for buyer and seller to agree to waive the 60 day eligibility for employees of the seller's plan, but that has yet to be decided.

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Asset sale, so the company/plan sponsor continues to exist, just doesn't have any assets (except cash). Unless buy/sell says otherwise, seller still maintains (and has responsibility for) the Plan and it can remain open indefinitely, until the sponsor terminates it. 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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3 hours ago, thepensionmaven said:

The buyer maintains a 401(k) to which all participants in seller plan will rollover ...

Not required.  If the buy/sell agreement says this, it's wrong.

3 hours ago, thepensionmaven said:

... but the plan has a 60-day eligibility requirement.

Perhaps the buyer's plan can include a waiver of this 60-day requirement for purposes of accepting rollovers?

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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David Rigby, curious to  know why this is "wrong".  I've seen many agreements that will specifically state this - upon the sale of the company, employees of the seller become employees of the buyer and become immediately eligible for entry into buyer's retirement program. Botn buyer and seller sign the agreement.

Since this a legal contract, separate and apart from the plan document, how could this possibly be "wrong"??  Obviously buyer's plan need be amended, or at least a corporate resolution amending the plan to allow these people to come in.

 

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CuseFan - "Unless buy/sell says otherwise, seller still maintains (and has responsibility for) the Plan and it can remain open indefinitely, until the sponsor terminates it."

Seller wants to terminate the plan as they do not know how much longer they will stay in business or have the money to contribute.  Are you saying the plan should not be terminated as of the date of the sale, but as of end of the 60 day eligibility for entry into the buyer's plan??

The fact that employer contribution for the short year made after the termination date and plan stays open for the 60 days negate the termination date being before the end of the 60 days?

 

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I think David Rigby meant the agreement should not say the seller's employees "will" roll over their balances, but that they "may" roll over their balances (although he can correct me if I'm misinterpreting). And, as he mentions, plans can allow immediate rollovers in even if the employee has not yet reached the regular eligibility requirements. 

Terminating the plan now or 60 days from now generally won't make a difference.

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OK, the only reason i mentioned"will" is that all participants will in fact rollover, but yes the "may" should be in there.

As far as terminating the plan now or waiting the 60 days, I know the contribution FOR the year can be made AFTER the short year, but how can the employer justify keeping a terminated plan open for those 60 days if the buyer will not amend their plan for an "age/service waiver for employees of ___________ and shall enter the plan  _________"

We're using the Datair document and the above is their language.

Thanks all.

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3 hours ago, thepensionmaven said:

As far as terminating the plan now or waiting the 60 days, I know the contribution FOR the year can be made AFTER the short year, but how can the employer justify keeping a terminated plan open for those 60 days if the buyer will not amend their plan for an "age/service waiver for employees of ___________ and shall enter the plan  _________"

The plan termination date is one thing, the final distribution date is another.  Your statement about making contributions after the short year doesn't make sense - let's assume a calendar year plan, term'd on 3/31.  Terminated just means no new contributions are accepted (accrued contributions, such as the SH for the prior year, are fine.  That plan can stay open for "a while" (generally not longer than 12 months, although going beyond simply means you have to keep the document updated).  Let's say you leave it open until Aug 31 in order to complete the contribution, and wait out the 60 day requirement for the other plan (as noted there are workarounds for that but I digress).  The deposit is made Aug 15, everyone rolls out on Aug 31.  Your short year is 1/1-8/31. No need for any special justification; things just take time.

Ed Snyder

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On 5/20/2022 at 12:38 PM, Bird said:

Terminated just means no new contributions are accepted (accrued contributions, such as the SH for the prior year, are fine.  That plan can stay open for "a while" (generally not longer than 12 months, although going beyond simply means you have to keep the document updated). 

Agree with above, but would point out that if you wanted more time you could "freeze" the plan instead of terminating it.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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