EBECatty

The following is the full paragraph in which the "substantial and recurring contributions" requirement is found. That sentence (the second-to-last) applies only to PS plans, but I read the remainder as applying to all forms of "plans" under 401(a). Although the fact pattern doesn't fit neatly into the permanency or other explicit rules in this paragraph, this would give me some concern, especially with no intent to ever have eligible compensation paid, 0% fixed contributions, and no other employees or employee contributions aside from the owner's rollover. In other words, can something ever be a permanent plan intended to receive contributions and benefit employees if it's explicitly set up to ensure neither of those things ever happens? 1.401-1(b)(2): The term “plan” implies a permanent as distinguished from a temporary program. Thus, although the employer may reserve the right to change or terminate the plan, and to discontinue contributions thereunder, the abandonment of the plan for any reason other than business necessity within a few years after it has taken effect will be evidence that the plan from its inception was not a bona fide program for the exclusive benefit of employees in general. Especially will this be true if, for example, a pension plan is abandoned soon after pensions have been fully funded for persons in favor of whom discrimination is prohibited under section 401(a). The permanency of the plan will be indicated by all of the surrounding facts and circumstances, including the likelihood of the employer's ability to continue contributions as provided under the plan. In the case of a profit-sharing plan, other than a profit-sharing plan which covers employees and owner- employees (see section 401(d)(2)(B)), it is not necessary that the employer contribute every year or that he contribute the same amount or contribute in accordance with the same ratio every year. However, merely making a single or occasional contribution out of profits for employees does not establish a plan of profit-sharing. To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees. In the event a plan is abandoned, the employer should promptly notify the district director, stating the circumstances which led to the discontinuance of the plan.

As long as the doctor's prior employer isn't affiliated with his/her new employer under 414, you would not take the prior employer's compensation into account for determining HCE status in the first year of the new employer's plan. See 1.414(q)-1T, Q&A 3: For purposes of the year for which the determination is being made (the determination year), a highly compensated active employee is any employee who, with respect to the employer, performs services during the determination year and is described in any one or more of the following groups [owner/comp over limit in prior year] applicable with respect to the look-back year calculation and/or determination year calculation for such determination year. If the prior/new employers are affiliated under 414, the doctor's prior compensation would count under 414(q)(7) and 1.414(q)-1T, Q&A 6.

I haven't personally, but I know others who have received DLs on individually designed ESOPs with a diversification timeframe outside the statutory 90-day window. I believe in one case explicitly tied to 90-day period following the company's receipt of the valuation. But it's been a few years as these were DLs for ongoing plans.

Read literally, the relief would apply to the 2021 plan year, assuming the seller meets the March 31, 2021, 80% threshold. I have questioned previously whether the relief would ultimately cover a situation like this one (e.g., the seller here meeting the March 31 threshold but laying off a significant portion of its employees in December 2021). That clearly wasn't the intent of the statute, so perhaps the IRS will limit its reach somehow. But if you count the 2021-2022 layoffs together, I'm not sure it would give you any cover beyond December 31, 2021. The partial termination relief only applies to "plan years" that include March 13, 2020, through March 31, 2021. It doesn't change any other calculations or exclude 2021 terminations for any other purpose. So if you're looking at any time after December 31, 2021, it's not clear to me that the relief would change the calculation if the 2021-2022 layoffs are combined to form one non-plan year "applicable period" for partial termination purposes.

I agree with your client. The SECURE Act RMD rules were intended to eliminate "stretch" RMDs based on the life expectancy of a beneficiary who is far younger than the participant. If an individual who is older than the participant (and therefore not more than 10 years younger) is the beneficiary, they wouldn't be able to stretch the RMDs over a longer life expectancy either way.

Interesting, and I don't think you'll find any clear guidance. Partial termination is ultimately a facts-and-circumstances determination, so I think be reasonable, consistent, and probably err on the side of caution. I would lean toward vesting based on the layoff counts across 2021-2022 if doing so would clearly cause a partial termination in the seller's plan if left separate from the buyer's plan. To take an extreme example, seller's plan covers 100 employees and buyer's plan covers 1,000 employees. In December 2021, 15 seller employees are laid off. Turnover rate of seller's plan is 15% for 2021, so no presumption of partial termination. The plans merge 1/1/2022. In January 2022, 50 more seller employees are laid off. On the basis of the merged plan, your 2022 turnover rate is <5% (50 out of 1,085). However, when looking at the layoffs across 2021-2022 as the "applicable period" you have laid off 65% of seller's employees. My gut says vest them.

I did something similar recently, but can't seem to find any of the analysis at the moment. I do recall being comfortable enough that it was defensible, although not perfectly clear, on the theory you mention.

There may be other complications I'm not thinking of off-hand, but could you spin-off the 401(k) portion into a separate plan, then terminate the 401(k) plan? The ESOP would not be a successor plan. I've done the opposite - added a new 401(k) to an existing ESOP by creating a new KSOP then merging the ESOP into it - and received a DL with the IRS treating the KSOP as a new plan. (This was after the elimination of the DL cycle, so the plan had to be new to get an initial DL.) Seems like the OP would be the same transaction in reverse, i.e., "un-merging" the two components into separate plans.

The SECURE Act age 72 RMD provision is "optional" in the sense that a plan can still keep all its existing substantive RMD terms that apply at age 70.5 as a matter of optional plan design. Any distributions forced out between 70.5 to 72 would not be required minimum distributions, they would just be regular eligible rollover distributions forced out by discretionary plan terms (that happen to align in every respect with the RMD rules, except still tied to age 70.5 instead of 72). No distributions would be required minimum distributions until the participant reached age 72, at which point all subsequent distributions made under those provisions would be RMDs.

Exact opposite here. I had always assumed #1, and honestly hadn't even considered the alternative, which I think makes more sense, until seeing this.

Not sure if this is asking about the original question (which was not mine) or my hypothetical, but in my hypothetical the plan would be designed with everyone in their own group for allocation purposes.

Thanks. It does seem much easier in situations like this. Just wanted to make sure I wasn't missing a piece of puzzle. I'm honestly not sure the "HCE gets less" rule applies here either, but thought I'd throw it out there. The regulation is not very clear, but does not seem to require a specific plan provision resulting in the lower HCE allocation. Doesn't matter either way for present purposes.

Bird, you read my mind. My post at the same time was intended to respond to the OP.

This raises an issue I've been thinking about recently, and I feel like I may be missing something very basic by never being heavily involved in the allocation/testing process. Can you put everyone in their own group for allocation purposes, then do a general rate group test based on contributions (not benefits)? My perception is that, as soon as everyone is put in their own group, most people automatically go straight to cross-testing. Our Relius documents do not connect the two; they allow an allocation method based on every participant in their own group separate from cross-testing. The only other option seems to be general testing. Assuming for the moment no other HCEs, it seems like the above situation would pass general testing based on a 3% allocation to 100% of non-HCEs but only 50% of HCEs. The age of the owner's son would be irrelevant. Is this a valid option? Also, 1.401(a)(4)-2(b)(4)(v) seems to allow the plan to retain a safe-harbor allocation even if one or more HCEs receives a lower allocation than the "normal" allocation.

I don't think you have parent-child attribution at all, assuming you're working under section 1563 or 414. An adult child is only treated as owning the parent's stock in a corporation where the adult child already owns (either directly or through another form of attribution other than adult child/parent attribution) more than 50% of the corporation. Assuming the son could only be attributed the parents' stock through the adult child/parent attribution rules, the son does not own directly, and is not deemed to own indirectly, any of Corporation A. The same rule would apply in reverse to determine the parents' ownership in Corporation B. If the only route to attribution is adult child/parent attribution, they are deemed to own 0% of Corporation B. So the ownership is: Corporation A, 100% parents; Corporation B, 100% son; no parent-child attribution; no overlapping ownership. See Treasury Regulation 1.1563-3(b)(6)(ii) and the example in (iv), particularly subsection (d) of the example. The same rule and example are found in 1.414(c)-4(b)(6). On the other hand, if the son is working for the parents' company, there may be some other type of attribution, but I don't think parent-child will get you there on its own.

I agree a 75/25 split would work, assuming no attribution (including options) or other application of the stock-exclusion rules. This could involve a review of the shareholder agreements, buy-sell agreements, etc. Also, unless the values of the two businesses are (and remain) identical, my guess is the owners will try to find some way to "equalize" the value of their ownership through something that may implicate one or more of the attribution/exclusion rules. Controlled group ownership can be premised on the voting power or the value of the stock owned, so changing voting share ownership to 75/25 may not break up the controlled group if there are different classes of shares that give the owners a closer-to-50/50 economic split.

In a stock sale, the plan sponsor entity still exists and continues to have all the legal obligations it had before the sale. It's the same as an ongoing business terminating their plan, just under new ownership. If the individual sellers are trustees, they can remain as such or can be updated by the buyer. But either way, the entity still exists.

Assuming it's an asset sale, as C.B. Zeller notes, the corporate entity will still exist after closing for any number of things. The corporation does not immediately dissolve when its assets are sold. It has to wind down all its other affairs (pay debts, file final tax returns, collect any lingering A/R not otherwise assigned, etc.). This includes plan-related items (final testing, 5500, distribution processing, etc.). Generally the corporate entity will remain active to handle all those items and then dissolve (whether formally or informally) once everything is concluded. So the simple answer is: Do everything the same way you have been doing it. It's still a plan sponsor, just one without an active operating business.

No, the "no amendment" rule is not that broad. It only prohibits changing coverage under the plan (i.e., if you make an amendment that substantially changes coverage, you lose the transition rule). Changing the trustee will not impact.

1. Yes, as long as M remains a separate entity (i.e., it was not merged into S after closing). 2. Yes, but generally it's recommended to appoint someone on the buyer's side if the sellers will not remain involved with M after closing. Also, M's plan cannot be terminated in 2021; if not maintained separately, it would have to be merged into S's plan to avoid successor plan issues.

I have only ever used the three-year catch-up contribution rule for 457(b) plans for FCUs (which usually isn't very helpful as they generally have maxed out the 457(b) limit each year).

In my opinion, this will become the biggest issue (assuming as Luke notes that there is no underlying PT based on the husband not having enough personal funds, etc.). If my experience is any indication, at some point the husband will want to engage in some form of transaction with the plan's interest, whatever that may look like. I dealt with a very similar situation recently where an individual co-invested alongside his plan several years ago, then the plan could no longer support its obligations in the underlying investment. We had to tell the individual he could not fulfill the plan's obligations or buy out the plan's share of the investment personally. In a fact pattern like this, it leaves few good options.

Yes.

True, but if you look at Section 5.01(3)(a) of EPCRS, the definition of an "Excess Amount" is much broader than just a 415 excess. I've always taken the language in 6.06(1) referencing Rev. Proc. 92-93 ("...generally treated in the manner described...") as meaning "use rules similar to." Just my two cents.

I think you have an excess allocation that should be corrected under 6.06(2) under the provision you quote. If you look one paragraph before, in 6.06(1), it says excess amounts should be treated/reported as described in Section 3 of Rev. Proc. 92-93 (https://www.msbo.org/pdf/403b/92-93.pdf)