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M&A-Asset Sale-Use of Seller's 401k Plan Deferral Elections??


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Have a plan sponsor who is acquiring another business in an Asset Sale.  The seller's 401k plan will be terminated.  The Buyer's plan has been amended to allow for service with the Seller towards vesting/eligibility in the Buyer's 401k plan.  The Buyer also wants to use the seller's Terminating plan participant deferral (pre-tax or roth) elections to immediately allow the seller's plan participants to defer into the Buyer's 401k plan (at least those meeting eligibility in the Buyer's plan).

Is this allowable?  I would think that one plan participant's deferral election cannot apply to another company's 401k, but I'm grasping....  

I'm hoping there is a workaround that I'm not thinking about though or something in the regs that would allow the buyer's plan to use the seller's plan deferral elections.  

Would the answer change if the seller's plan was merging into the buyer's 401k?

All help is greatly appreciated!  

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Allowed?  I'm not going to opine on that because legal or not, I think it is a bad practice.  Start with, rarely, if ever, are plans "identical" - which means participants really aren't making "informed decisions" about their deferrals - let alone investments (even if a QDIA is used, the specific QDIA may be a factor in a participant's decision to participate or not, and to what level.  We've had clients who wanted to do that, and even suggested a "negative election" approach (i.e., unless you tell us otherwise, we're going to enroll you in the plan at your deferral rate in your prior employer's plan/  I like that less (as I read the regs, a deferral, other than an ACA, must be an affirmative election).

Tell the acquirer that tis is a great opportunity to impress their new employees with the benefits of the new employer's plan, probably other benefits as well, and could be a good introduction to the company.

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@MoJo Thanks for the reply...yes, they are considering a negative election approach.  I'm trying to find information saying that is not an alternative to getting an actual new election by the new employee.

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Does their previously-executed form indicate what employer and plan the election applies to?

(Makes a merger more likely to be okay, compared to a new employee at the acquiring entity.)

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50 minutes ago, ERISAGal said:

@MoJo Thanks for the reply...yes, they are considering a negative election approach.  I'm trying to find information saying that is not an alternative to getting an actual new election by the new employee.

I'm not sure anything "authoritative" is out there on negative elections (I've looked) - it's more the sum total of lots of experience and cobbling together a bunch of other rules to surmise the conclusion.  Start with for years we struggled with auto enroll plans until codified in PPA.  They'd be better off just auto-enrolling all new hires (including those from the asset purchase) at a set amount.  We know that works.  Fooling around with negative elections is a recipe for one disgruntled new employee to call the IRS/DOL and trigger more unhappiness....

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Beyond MoJo’s observations:

A plan’s administrator must meet its responsibility “in accordance with the documents and instruments governing the plan[.]” ERISA § 404(a)(1)(D).

An employer might amend its plan to provide an automatic-contribution arrangement for all.

Or an employer might, subject to coverage and non-discrimination rules, amend its plan to provide an automatic-contribution arrangement only for a specified class of eligible employees.

But it might be awkward for such an arrangement to specify that the default elective deferral is not a plan-provided and notice-specified percentage of a participant’s compensation but rather the elective deferral the individual elected under a specified former employer’s plan.

Further, if your client states its plan using IRS-preapproved documents, it might be impractical to state the desired provisions within the form of those documents.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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