merger of safe harbor 401(k)'s

[R. Butler]

Co A sponsors a safe harbor 401(k) with basic match.

Co B sponsors a safe harbor 401(k) with an 100% up to 6% safe harbor match.

Co. C will be formed. Co. C will purchase both Co. A & Co. B in asset sale 10/01/06.

They are hoping not to terminate the plans & trigger distribution.

They want to maintain safe harbor status.

They are not adverse to merging the plans.

I don't see how they can merge the plans in 2006 & maintain the safe harbor status because they use different match rates. Even if they were willing I don't see that they can increase the match rate under Co. A's plan to 100% up to 6% in 2006; it wouldn't meet the uniform formula requirement for the match. Am I missing something?

Is there any reason Co. C couldn't maintain both plans for the remainder of 2006 just to maintain the safe harbor status for both plans?

Thanks in advance for any guidance

[JanetM]

Transition rules allow you to test the plans separateley until 12/31/07 - an guessing the plans are 12/31 year end. So with that said, you could keep the two plans place and merge anytime in 2007. After 1/01/08 you will have to aggregate the two groups for testing.

To merge the plans you will have to settle on single formula due to uniform allocation rule.

[R. Butler]

To merge the plans you will have to settle on single formula due to uniform allocation rule.

What I am trying to verify is whether they could even possibly merge the plans in 2006 & maintain safe harbor status. In 2007 they'll change to one formula & merge, but its my undersatnding that neither could amend the formula during 2006. And if neither plan can amend the formula for 2006, then they can't be merged during 2006 & maintain safe harbor status. Is that correct?

Thanks

[Tom Poje]

I don't believe you could merge them in the current year and maintain safe harbor status. I don't see how that would be any different than what you have - 2 plans, currently you are not permissively aggregating them for nondiscrim testing.

furthermore, I believe the transition rules only apply to coverage and not nondiscrim, so the ADP testing does make a difference. I always have to look that one up cuz I get a brain freeze on the issue.

[JanetM]

Right, to merge in 2006 will lose safe harbor status. You would have to do it on 1/01/07 and pick single formula for everyone.

Tom, if the are safe harbor don't they get ADP free pass and just have to satisfy ACP if there is after tax contributions?

[A Shot in the Dark]

You don't mention wheter or not company a, b and or c are a controlled group or an affiliated group.

Why merge the plans? I think it makes more complication than neeeded.

If it is an asset sale as you specify, then plan a stays with company a, plan b stays with company b and company c creates a new plan.

Presumably with an asset sale all employees will separate service with the respective company a or b, and possibly hired by the new company c.

It is immaterial what plan design a or b is. Plan design c for the new plan can be what it will. It is a new company with a new plan.

At the end of the day, the employer company a will have zero employees and a partially terminated plan due to the separation of service of all employees due to the sale. The same will be true with company b.

Company a and company b will proceed through whatever plan termination process is appropriate.

[Tom Poje]

Janet:

My comment was meant in reference if the plans were merged. They get the free ride transition ride on coverage, but safe harbor is lost so ADP does make a difference. (as opposed to you get a transition on both coverage and nondiscrim)

ugh, now I see I have to modify my ASPPA talk on safe harbor 401k to include the automatic enrollment safe harbor. granted it won't be available for a year or so, but what the heck.