EBECatty

It looks like the preamble to the final regs addresses this (if I'm reading it correctly). See Section IX.C, or top of page 19,270 of Fed. Reg. https://www.irs.gov/irb/2007-19_IRB "The provisions governing subsequent deferral elections apply to all changes in the time and form of payment, whether resulting from the addition, deletion or substitution of another payment event. Commentators requested clarification of how this provision would apply where the events were not specified dates, such as the substitution of a change in control payment event for a separation from service event. In such a situation, to satisfy the rules governing subsequent deferrals, this substitution would only be permissible if the change were not effective for one year, and provided that the payment would only occur upon the later of a change in control event or at least five years following a separation from service." The "later of" language refers back in the same paragraph to an example where the plan pays out on the later of two events. So I guess in your situation (1) the new terms couldn't take effect for at least 12 months, and (2) the payment would be on the earlier of (a) a CIC or, (b) five years following termination of employment? That's my best guess at least.

This one may be obvious but unhelpful: The employer could pay off the loan or at least enough to offset the taxes caused by default. I've seen the latter done once where for some reason the circumstances just didn't align for loan rollovers (although I don't for the life of me remember why now). It was only 2-3 employees and a few thousand dollars, which in the context of a multimillion dollar acquisition was an acceptable cost.

It really limits the options if (a) the seller is not willing to accommodate, and (b) the buyer is not willing to accommodate. Those are pretty tough facts. For what it's worth, I think the seller's loan policy could be revised to open up post-termination repayment to only those employees impacted by the divestiture/spinoff. They should be able to objectively determine that group. As long as it's not favoring HCEs I don't see why that would be a problem. Then the buyer just adds a payroll deduction for the employee. I've also seen bridge loans used, but that requires the buyer to have a 401(k) from which the participant can take a new loan. The employees could take a personal loan (from the employer or a third-party), repay the 401(k) loan, then have a loan outside the plan entirely.

Yes, and I think they would have to follow the employee's regular deferral election unless 401(k) participants are allowed to make separate bonus/irregular comp deferral elections.

Good point about the deferral elections. I assume you could also leave the CIC payment trigger in the plan after the sale of Sub 1, such that if the parent company sells Sub 2 a few years it would trigger the CIC payment event again as a sale of (probably almost) all of parent company's assets. That would distribute the deferrals made after the sale of Sub 1.

Correct, but the plan would not be terminated, and the distribution would not be based on a termination/liquidation. It would just be based on a CIC as a permissible payment event. There's nothing requiring that a plan MUST be terminated upon a CIC, just that it MAY be terminated without running afoul of the acceleration rules.

Say a parent company with two operating subsidiaries sponsors a nonqualified plan in which balances pay out upon the first to occur of death, disability, severance, or change in control. There are participants employed by the parent company directly in addition to the two subs. The plan's change in control definition is sale of 50% or more of parent's stock or parent's assets. On a FMV basis, Sub 1 accounts for 70% of parent company's assets; Sub 2 accounts for the other 30%. Parent company sells Sub 1 and triggers a change in control for parent company employees. Parent company will continue running Sub 2 and will continue to employ the same parent-company employees. Has anyone seen a scenario like this where the plan balances are paid out because of the change in control, but the plan is not otherwise terminated? So, assuming no amendments to the plan before the change in control, the existing balances would be forced out, then the parent-company employees could start deferring again? Technically it's just a permissible payment trigger that causes the distribution of prior balances, so I see no reason why the plan couldn't continue. Thoughts?

Interesting point, thanks. I like the fringe benefit argument--my half-joking response to whether odd types of pay are "fringe benefits" usually is "do you want them to be?" Like you said, though, I suspect that most plans define W-2 wages pretty narrowly in the 401(k). I happen to have our firm's pre-approved Relius documents sitting on my desk and they define it as all wages under 3401(a) and any other item of compensation paid that is required to be reported on a W-2. Assuming the plan uses this definition and doesn't exclude fringe benefits or any other category that may apply, I think you would be stuck.

This was the only line of reasoning I could think of--that the employer explicitly or implicitly amended the 401(k) plan with the other document--but I just can't imagine it ever actually working in practice (board resolution; SMM; including in determination letter application/plan restatement if individually designed 401(k); etc.) If the true intent was to amend the 401(k) plan, they would have--and should have--just amended the 401(k) plan to exclude that category of pay.

That's my position as well. Just wanted to see if anyone knew of any theory under which this was permissible. I've seen it in plans drafted by competent people, even in some included in public company disclosures.

I've seen this a number of times in all sorts of contexts, and can never quite bring myself to accept that it works. Say an employer has a 401(k) plan that defines "compensation" as W-2 wages with no exclusions. They also have some other type of plan (call it incentive compensation; long-term performance plan; performance-based bonuses; employment contract giving an executive a bonus as a percentage of division's profit; etc.) that gives employees what are essentially cash bonuses, however labeled, that are clearly W-2 wages in the year paid. The other plan or agreement in the boilerplate then says something along the lines of "any amount paid under this plan/agreement shall not be included for any other purpose, including any pension plan, etc..." Is there any reasonable argument to be made that you can exclude the payment for purposes of the 401(k) compensation?

This is from the same section of Rev. Proc. 2016-51, the current version: The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit).

Fair point, and is what I would recommend if I had my choice. The one situation where I've dealt with non-controlled group employers in the same NQDC plan it was already in place and we were forced to work with it for a variety of reasons.

FWIW, there's at least one PLR with similar facts ruling on a rabbi trust: https://www.irs.gov/pub/irs-wd/9901007.pdf Each individual participating employer had a bookkeeping account for its employees only. If the individual employer became insolvent, only the bookkeeping accounts associated with that individual employer would be subject to the employer's creditors.

No, but most recordkeepers will tell you that you do. You don't.

I work with a plan that does this. It's individually designed so we have leeway. The definition of comp for deferrals is W-2; for matching it's W-2 less bonuses. They test ADP on total W-2 comp and test ACP on W-2 comp less bonuses. The comp calculation on W-2 less bonuses passes the ratio-percentage test as it's mostly the executives getting disproportionately large bonuses.

I've seen it done before as well. I think of it like a multiple-employer 401(k) where you have a few subsidiaries/affiliates that are related, but not related enough to form a controlled group. It's been a few years, but I recall the issues were mostly operational along the lines of what Madison71 mentions: Are you following the rights rules for separation from service; what types of change in control will trigger consequences; who is paying out the deferred compensation; etc.

Correct.

No limit (except at some point reasonable compensation rules).

I'd have to dust off my research, but I think you still get the transition period under 408(p) because you haven't changed the coverage of the SIMPLE. The 408(p) transition allows you to "violate" the one-plan rule for a limited amount of time as long as you don't modify coverage in the SIMPLE. You changed the coverage of the 401(k), so if Corp A is relying on the 410(b) transition rule it might blow that on the 401(k) side. But as long as you haven't added any Corp A employees to the SIMPLE, you still have the SIMPLE transition period and can terminate the SIMPLE presumably at 12/31/18.

If the Corporation B employees are now employees of a wholly owned subsidiary of Corporation A, why couldn't they participate immediately in the 401(k)? You wouldn't have to terminate the SIMPLE mid-year; just "encourage" the employees to begin participating in the 401(k) instead. If they use the employer match in the SIMPLE you would only have a partial year worth of deferrals to match. Off the top of my head, my recollection is that the SIMPLE transition period in 408(p) allows the 401(k) sponsor to continue maintaining the SIMPLE without violating the no-other-plan rule or greater-than-100-employees rule as long as you don't make coverage changes to the SIMPLE. The situation above wouldn't alter coverage in the SIMPLE.

I haven't done an anonymous one under the 2016 Rev. Proc. so it may have changed, but my experience has been you file a normal application the first time, just redacting the identifying information, then once the correction is approved you simply identify the plan sponsor (name, EIN, etc.). I don't recall having to submit a second VCP application.

In an asset sale, generally the seller's employees start participating in the buyer's 401(k) plan (assuming the buyer is an existing practice with a plan in place). They generally are granted service credit for vesting and eligibility as of their original date of hire with the seller so they don't start over from scratch. Generally the seller terminates the existing plan and everyone rolls over their balances. If the buyer doesn't have a plan, the buyer can either (1) assume the seller's 401(k) plan or (2) start a brand new one. If the buyer assumes the plan, everything stays as-is (vesting, eligibility, etc.); the plan just has a new sponsor. Hope this helps.

Fully agree with all of Luke Bailey's points. If it's close to the end of a plan year, they may consider the cost of another 5500/audit as well. That, and the employees' desire to get their money, are the two biggest pressure points I see. I typically don't see asset sellers waiting for no reason. We generally require that they terminate their plan before closing (or shortly thereafter) either way. That said, I have seen one asset sale where the selling shareholder was going to keep the corporate entity alive and operate a somewhat-related business with at least himself and a few other employees. He wanted to keep the 401(k) in place so never terminated and just let everyone take their (fully vested due to partial term) distributions and roll them over to the buyer's plan. All depends on the circumstances.

Not sure if this will help, but the IRS has a 20-page memo on the topic of taxation of employee claims: https://www.irs.gov/pub/lanoa/pmta2009-035.pdf Might not do any good in this case, but we've used it before proactively to nudge the plaintiff's attorney in the right direction. Generally I've seen the plaintiff's attorney wants everything on a 1099 regardless of the claim.