Combined Plan with Multiple Contribution Formulas

[Guest Ralph]

Company A purchases Company B & Company C. Both purchases are stock sales. All three companies currently maintain 401(k) plans.

My understanding is that by virtue of the purchases being stock sales, Company A now has responsibility for acquired companys' plans. It doesn't seem like there is a distributable event & , therefore, Company's A's options are limited to:

1)Merging the plans

2)Maintaining plans Separately

3)Freezing the Plans (when would this be advantageous?)

Company A would like to merge all three plans together but wants varying employer contributions. If "merged plan" allows for varying profit sharing contributions by employer, I believe they will need to do rate group testing under 401(a)(4). If, however, Company A elects to maintain plans separatetly I believe they will still need to do the rate group test based on the entire controlled group. In effect, from a discrimination testing perspective it doesn't matter if they merge the plans or not.

What if Company A decides they also want varying matches by employer? Would this be subject to the 401(a)(4) test or just the ACP test? If just the ACP test, how would that work.....since you only look at eligible employees? Would you do an ACP test for each participating employer?

Any comments or suggestions would be helpful.

[Tom Poje]

is top heavy an issue? that might make a difference between having one plan as opposed to three plans.

also, if eligibility is different between the plans, then it makes a big difference when you test - depending if you permissively aggregate the plans or test each plan 'separately' by treating all other ees who meet the eligibility in the tested plan as includable and not benefiting.

[Guest svatty]

Your company could have required, in the merger agreement, that the target company terminate its 401(k) plan effective as of one day prior to the closing of the transaction. This would have permitted a distribution from the terminated plan based on such plan's termination.

This also gets you around the successor employer issue because the "definition" of successor employer is determined as of the date of the termination (one day prior to close) and thus your buying company was not in its controlled group at that time.

Check a billion different merger agreements on Edgar to see how this is typically structured. I have gotten probably a few hundred IRS determination letters is this situation; and yes with the termination date one day prior to the closing, clearly spelled out for the IRS and the fact that distributions will occur/have occurred already spelled out as well.

[PMC]

If the Plans are merged and there are different Matching and PS contribution allocations under the one plan for each of the 3 companies, then wouldn't you test under 401(a)(4) and BRF across the entire controlled group for each separate Match and PS allocation? And for the ACP, combine and test all of the eligible employees in the plan for the entire controlled group.

Top heavy testing and required aggregation aside, if each Plan can pass 410(b)and are kept separate, wouldn't you just test the eligible employees under that particular plan, and not take the other 2 companies employees into consideration for 401(a)(4)?