Vesting with merger of MP and PS plans

[Alan Simpson]

Does anyone have a definitive answer on the IRS position regarding whether you have to 100% vest participants in a MP plan that is being merged with a PS plan?

[Alan Simpson]

I have since talked with a representative with the PE division of the IRS and was told that up to a week ago he would have said 100% vesting is not required. However, there is to be a meeting on the first of the month (I believe in Washington) and this will be discussed. Perhaps we will get some final guidance after that.

[KJohnson]

This may be old news, but in the MPP termination/merger session at the Mid-Atlantic IRS benefits conference last week Wickersham said that vesting was not required.

Earlier in the day Shultz had said that gudiance was forthcoming on this issue and that we would be "pleased."

[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.

[BFree]

Kirk - why do you think this such a recurring issue if it was settled 27 years ago? Because EGTRRA has made the merger of MPP and PSP plans more common? Because the plans are not of the same type (granted, both are dc plans)?

[Kirk Maldonado]

BFree:

Because virtually nobody else knows about that obscure IRS document, it is very hard to locate, and it is not often cited in secondary source materials.

[mbozek]

There is also a belief by some in the benefits community that a merger of two plans is considered to be the termination of the plan that is merged, e.g., if a mp plan is merged into a ps plan and the ps plan continues the mp plan is deemed terminated. I believe that the merger rules are cited in the IRS termination worksheets

[KJohnson]

MBOZEK--Wickersham seemed to indicate that his initial thoughts were originally along those lines. From a "real world" perspective the employer was getting rid of the MPP and why should the rules on termination be different from merger.

He also made a series of comments regarding the potential of forfeitures reverting to the employer which is an indication of a partial termination. However, I didn't completely follow these concerns since I believe that the rules on allocation of forfietures for PS plans and MPP plans have been the same since TRA '86.

Wickersham is obviously brilliant and knows the regs inside and out. He is also incredibly useful at these conferences He often, however, "thinks aloud" when answering certain questions (Which in itself can be useful if you can follow his train of thought but if you are not listening carefully you may hear two contrary answers in his musings before hearing the final response.)

At any rate, he did say that after a good bit of study they had concluded no full vesting --which was followed by a round of applause from the crowd.

[Kirk Maldonado]

Historical note. Many years ago, I was an attorney at the IRS and Dick Wickersham was my Branch Chief.

[Guest DaveL]

Related question: If the merged MP plan used forfeitures to reduce the employer's contributions, does MP money forfeited after the merger retain its MP character under Rev. Rul. 94-76? If it does, using the post-merger MP forfeitures to reduce what would otherwise be PS contributions looks a little tricky. Could the employer allocate the MP forfeiture money among only the actives with MP accounts, then use the new PS money to equalize the contributions for everyone?

For example, suppose that there are five active employees in a year after the merger. Four (A-D) have MP accounts, and one (E) was hired after the merger and has only a PS account. All have equal compensation for the year, and each is entitled to a contribution of $5,000. There's $1,000 of MP forfeiture to allocate. If the plan so provides, could you use the forfeiture to reduce the employer's $25,000 contribution to $24,000, allocate the forfeiture $250/each to employees A-D (to be held in their MP accounts), and allocate the $24,000 in new money $4,750/each to A-D and $5,000 to E?

[rcline46]

To DaveL - No, No, No.

Once merged there is no MPPP. It is a Profit Sharing plan, and allocation of any forfeitures, whether from the protected MPPP accounts or from the PSP accounts is PSP forfeitures and you must follow the rules of the PSP doc for allocation. As a rhetorical question - how can you follow the rules of a non-existent plan?

[Guest DaveL]

I know how a merger works. But Rev. Rul. 94-76 says that after merging MP into PS, you must continue to track the MP $ separately and follow MP rules (QJSA/QPSA, etc.) for those MP $; i.e., you must incorporate those rules into your PS document. My question has to do with whether IRS would stretch Rev. Rul. 94-76 to forfeitures from the MP accounts. I'm trying to think through how to draft the document, not how to follow one.

[Mike Preston]

IAWR. This was one of the questions addressed from the podium by Jim Holland and Dick Wickersham at the 2001 ASPA Annual Conference. The forfeitures do not retain their MP character.

[Guest DaveL]

Thanks, Mike. Now if they'd just put that in writing....

[Mike Preston]

You can always buy the tape.

[Guest DaveL]

I don't doubt the answer, I just have a conservative client that's hesitant to proceed without something definitive (small administrative savings, fairly significant forfeitures).

Thanks again.

[mbozek]

Why cant you ask for IRS approval of the forfeiture provision by filing a 5310 form stating that the forfeitures will become assets fo the surviving plan? I thought that a 5310 form covered mergers as well as terminatons but that usually mergers of dc plans were not required to file 5310 forms.