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Thankfully, this plan is not going to cover the union employees. So while I understand the possible issue with putting that on a union employee when it's not in their contract, that isn't my problem (at least, not today). I came to the same eventual conclusion - if nothing says I can't count them, then I have to count them, even if they're not eligible for the plan. I suppose it is similar to having a class exception (that meets 410b) - they are still employees even if you're not offering the plan to them. Thanks!

Buyer is still sponsor. Buyer's plan issues, if any, do not automatically and instantaneously go away either, so perhaps the buyer should do the proper thing and address/correct compliance issues and then merge the plans. If issues were due to buyer's deficiencies, controls and procedures should be put in place so same doesn't happen with merged plan. If issues were due to buyer's plan provider/recordkeeper, then maybe target's plan provider should service the merged plan or at least until an RFP can be run for new provider.

The statute’s exception refers to whether “the employer maintaining the plan normally employed more than 10 employees.” I.R.C. (26 U.S.C.) § 414A(c)(4)(B). Here’s the Treasury’s proposed interpretative rule: https://www.govinfo.gov/content/pkg/FR-2025-01-14/pdf/2025-00501.pdf. To count the number of employees the employer “normally employed”, the proposed interpretation cross-refers to 26 C.F.R. § 54.4980B–2/Q&A–5. I see nothing that excuses from the count employees covered by a collective-bargaining agreement. But a plan’s sponsor or administrator might want its lawyers’ advice about whether one should interpret an implied delay of § 414A’s tax-qualification condition if implementing an automatic-contribution arrangement now would breach a currently effective collective-bargaining agreement or otherwise violate labor-relations law. Until the applicability date of an effective final rule, one might rely on a reasonable interpretation of the statute. Even if a consultant otherwise is comfortable providing advice about tax law, one might be reluctant to advise about tax law that’s affected by labor-relations law. This is not advice to anyone.

I have not encountered a situation in which either a § 3(38) investment manager or a § 3(21) investment adviser was involved in preparing or reviewing a 404a-5 disclosure. Imagining your hypo, a smart lawyer might suggest her client limit the scope of the lawyer’s advice to whether, following ERISA § 404(a)(1)(B), the administrator reasonably may rely on the investment adviser’s advice, assuming the administrator would get the adviser to confirm in writing that its advice includes considering whether each comparator is “an appropriate broad-based securities market index” regarding the investment alternative for which it would be a comparator. If the administrator loyally and prudently selected the investment adviser, that and other surrounding facts and circumstances might make it reasonable for the administrator to rely on such an adviser’s advice about the fact-related question. While a relying fiduciary must not unquestioningly accept advice, a fiduciary using no less care than a similarly situated, experienced, and prudent fiduciary would use might find no fault in the advice. If the plan’s administrator does not limit the scope of the lawyer’s advice (and the lawyer accepts the task), a lawyer must provide her candid advice. If a plan’s administrator sees differences in its investment adviser’s and its lawyer’s advice, the administrator should discern—with whatever further advice the administrator gets—each better-reasoned finding. Or, with her client’s consent, a lawyer might discuss with the investment adviser its advice, and either might consider how to reevaluate and harmonize one’s advice. This is not advice to anyone. I suspect many of our BenefitsLink neighbors wonder why we’re thinking about situations that in their experience occur rarely, or perhaps never. In my work, it’s real.

I agree with @Peter Gulia. It takes far more time to file on paper than to file electronically. This is the practical business reason to file electronically. The biggest exposure is a plan that is eligible to file on paper can choose to file electronically, but a plan that is not eligible to file on paper but does file on paper is considered by the IRS not to have filed. Why risk being subject to penalties, particularly if the plan sponsor cannot accurately count all of the forms that they filed with the IRS during the year? This is the practical penalty avoidance reason to file electronically. Can the IRS count the number of forms a filer submitted during the year? Yes, they can. The IRS has Entity Control Units in Kansas City, MO and Ogden, UT that manage EINs across all filings. Betting that the IRS cannot easily get a count of forms is not a good bet. Just some thoughts.

Wow, this situation raises more than one red flag. Asking if it can be done should come after someone asks lots of questions, the first of which is, "why do you want to do it that way?" @CuseFan poses a very good question: "...buyer knows its plan has issues and wants it to go away?"

Your scenario certainly presents a trap, and potentially and especially for the plan administrator. Extending the scenario, assume the plan engages a financial advisor as a 3(21) or 3(38) fiduciary, and the financial advisor prepares or reviews and approves the content of the 404a-5 disclosure. Assume further that the lawyer is asked by the plan administrator to review the appropriateness of the benchmarks in the disclosure and the lawyer's comments that the benchmarks are questionable or maybe even inappropriate. Where does this leave the plan administrator, the financial advisor and the lawyer?

Question 1. Depends. A fiduciary of an ERISA governed plan may eliminate a group annuity contract (GAC) and not breach their fiduciary duties, even if the participants incur large losses. However, this is a legal question that depends on the facts and circumstances and would only be answered after a participant files suit and there is a determination in court. Here, where the plan sponsor by its actions is going to create large individual losses, you friend should be taking all actions necessary to minimize the risk of a finding of breach of fiduciary duty. Your friend needs to be able to show that he fulfilled his ERISA fiduciary duties. He can’t just say I don’t like the GAC and I want mutual funds. He has to show that he conducted a prudent and detailed analysis of whether surrendering the GAC and paying the surrender charge is in the best interest of the participants as a whole, taking into consideration the current market and participant needs. He should do a detailed comparison of the various alternatives, i.e., holding the GAC, a partial surrender, total surrender, costs of other investments, etc.. It is a given that he must show that he followed all the plan provisions and also the GAC provisions to ensure that the minimal surrender charges were paid. If possible, he should consult with an independent financial advisor/expert (preferably not the advisor he is moving to.. to avoid conflicts of interest) to ensure the decision was prudent and in the best interest of the participants. As with all fiduciary decisions, but especially here where there may a high risk of litigation (he is in essence creating a loss), he must be certain to document his decision (including detailed records of all the analysis performed, alternatives considered, the decision-making process, and the reasons for the final decision to surrender the GAC, etc.). Also, he should attempt to effectively communicate the change to the participants showing how it is in their best interest to do this. Of course, he has to walk a fine law … if he shows the GAC is such a bad deal someone might consider filing suit questioning the initial decision to put all the money in the GAC in the first place. Another option which many plan sponsors utilize when in this situation is simply freezing the GAC and redirecting new contributions into new investments, e.g., mutual funds. Here, he simply stops adding any more money to the GAC and in essence starts a new investment plan with the new mutual fund investment slate. At the point the GAC surrender period expires, he would terminate the GAC without the surrender charges and the GAC money would then flow into the new investments. Don’t know how long the surrender period is but at least for some of the money the participants will have more control. He may need to amend the plan for this. It doesn’t sound like your friend would want to do this but some plan sponsors will pay the surrender charges. Paying the surrender charges is more complex under the tax code and, if desired, your friend should consult an ERISA benefits attorney. see @CuseFan Question 2. This allocation should already be addressed in the plan and the GAC. All qualified plans must have “definitely determinable” benefits. Even though the funds are all invested in a single GAC, there should be current terms under which those funds are allocated to each of the participants. As you state, they are all getting statements now that track the amounts in the GAC allocated to each of the participants. The surrender charges would be allocated amongst the participants under a formula in the plan/GAC. There must have been participants who terminated employment and qualified for a distribution from the plan. How were their benefits determined? Overall, your friend should stay away from any type of modification or amendment of these provisions. Just thoughts...

Buyer sponsors plan, terminates plan, then becomes sponsor of acquired plan. Yes, I think you have successor plan situation. Can they terminate, sure, but that won't be a distributable event. Why not merge plans - what is the aversion? I understand not wanting potential compliance liability for acquiring someone else's prior mistakes, but isn't that part of due diligence and indemnifications? In your situation, if the buyer is willing to sponsor the plan of its acquisition, why would it not want to merge? Unless buyer knows its plan has issues and wants it to go away?