"Conversion" of MP plan to a 401(k) PS plan

[Guest Kelly Igel]

I occasionally hear other practitioners refer to the "conversion" money purchase plans to 401(k) profit sharing plans.

What is the preferred mechanism to do this... set up a brand new 401(k)/PS plan and then merge the money purchase plan into it? (Noting that the 204(h) notice is properly met and there are no 411(d) protected benefit issues...)

Or can a money purchase plan simply be amended and restated into a 401(k)/profit sharing plan?

[wmyer]

I have been thinking a lot about this issue as well. Looking at Rev. Rule 94-76, it seems that you can simply amend the profit-sharing plan to a pension plan. However, the assets have to retain their attributes as pension plan assets, which means QJ&SA, and restrictions on distributions. Benefits: You get to keep same IRS plan number, you don't need to file a second 5500, it may be administratively easier.

[Guest JPCMPLS]

What is the current thinking on the need to vest the old money purchase monies when one converts to a profit sharing plan? I have heard that so long as participants have the opportunity to increase their vesting in these amounts and the 204(h) notice is given, 100% vesting is not required.

[wmyer]

I agree with you, JPCMPLS. The employer could accelerate vesting if he chooses to, but the participant need not be made fully vested upon "conversion."

[Guest sdolce]

This is an age-old question that never seems to get resolved(an attorney asked me the same thing earlier this afternoon).Are there any cites to back up the contention that full vesting is not required? Please don't misunderstand, I like the answer. I just would like some support for the position.

[Guest JPCMPLS]

I have researched this issue from time to time and come up empty each time. The only guidance is Code Section 411(d)(3) which says in the case of a profit sharing plan ("plans not subject to Code Section 412), a partial termination only occurs upon a "complete discontinuance of employer contributions". Treas. Regs. Section 1.411(d)-2(B)(1) says that partial termination is determined based upon "facts and circumstances" and only gives two examples. The first is the traditional layoff or exclusion of a group of employees previously covered by the plan. The second is "plan amendments which adversely affect the rights of employees to vest in benefits under the plan." The remainder of the regulation deals with defined benefit plans, which would not be applicable to a MPP/PSP conversion. It would appear that a conversion which does not change eligibility or the method of counting service (e.g. the accrued money purchase benefits will continue to vest under the existing schedule), will not be considered a partial termination.

I posted the original response to see if anyone else had found authority beyond the Code and regs.

[david rigby]

Not sure if Reg. 1.414(l)-1(d) helps.

http://www.access.gpo.gov/nara/cfr/cfrhtml...6/26tab_00.html

(d) Merger of defined contribution plans. In the case of a merger of two or more defined contribution plans, the requirements of section 414(l) will be satisfied if all of the following conditions are met:

(1) The sum of the account balances in each plan equals the fair market value (determined as of the date of the merger) of the entire plan assets.

(2) The assets of each plan are combined to form the assets of the plan as merged.

(3) Immediately after the merger, each participant in the plan as merged has an account balance equal to the sum of the account balances the participant had in the plans immediately prior to merger.

The noteworthy item is that vesting is not mentioned.

[R. Butler]

We have converted an MP plan to a PSP w/ 401(k) without making everyone 100% vested. We rely on the reg. PAX cites

[Guest JPCMPLS]

I have not relied on 414(l) because the regulation states:

"c) Application of section 414(l) -- (1) Two or more plans. (i) Section 414(l) does not apply unless more than a single plan is involved. It also does not apply unless at least a single plan assumes liabilities from another plan or obtains assets from another plan (as in a merger or spinoff). For purposes of section 414(l), a transfer of assets or liabilities will not be deemed to occur merely because a defined contribution plan is amended to become a defined benefit plan. This rule will apply even if, under the facts and circumstances of a particular case, a termination of the defined contribution plan will be considered to have occurred for purposes of other provisions of the Code."

I am not confident that a conversion of a plan from one type to another satisfies the 2 or more plan requirement.

[R. Butler]

Assuming the "2 plan concern" is vaild, couldn't the same result be accomplished by adopting the profit sharing plan first and then merging the plans?

[Dave Baker]

I always thought the rationale behind full vesting upon a plan termination was that the employees would have no further chance to earn additional years of service for vesting purposes (because the plan's going away). So if the plan has a five-year cliff vesting schedule, somebody who only has three years of service for vesting at the time of termination would be out of luck but for the full vesting rule, which essentially gives the employee the benefit of the doubt -- "OK, we'll assume you would have worked two more years of service."

When a money purchase plan is merged into a profit sharing plan or when its formula is changed so that the promised annual contribution becomes a discretionary employer contribution, this doesn't affect the terms of the plan regarding vesting service. Employees continue to have the ability to earn additional years of service for vesting, after the merger or amendment. So there seems to be no rationale in such a situation for requiring full vesting.

[Kirk Maldonado]

Full vesting is not required upon the merger of two defined contribution plans, provided the requirements of Section 414(l) are satisfied. Q&A-16 & 18, TIR 1408, October 30, 1975.

[Everett Moreland]

Do you know of any pension service that includes TIR 1408 ?

[AndyH]

Do we still think vesting is not required upon a mp merger into a ps?

I thought at ASPA I heard a definitive NO, full vesting is not required. But, now I've just heard that supposedly Jim Holland said YES at a recent ALI ABA conference.

Any updated news on this issue?

[Appleby]

Here's a good piece on the subject

http://www.corbel.com/news/pensionupdatesd...tail.asp?ID=158

[AndyH]

Thanks. I just found that a little earlier myself. Looks like it was posted today.

[Kirk Maldonado]

TIR 1408 used to be contained in the CCH Pension Plan Guide. But I no longer have that service, so I can't verify that it is still in their materials.

[Guest kkost]

I found TIR 1408 on CCH under Misc-DOC, Pen-Rul at 300,045.