Money Purchase Plan Merger

[Guest pjrieck]

Can a final Money Purchase Plan contribution be deposited into a Profit Sharing Plan following a plan merger?

[mbozek]

I am assuming that the mp plan assets have been transferred to the PS plan and that the MP plan was amended for gust and for any other changes applicable for 2002. If the MP plan still exists then the employer can make the contribution to the MP plan for 2001 and then the mp plan can transfer the assets to the participants accounts in the ps plan. I would not make the contribution to the PS plan for a 2001 contribution that was due to the MP plan because ps deductions are limited to 15% of covered comp and the conditions for contributions to a mp plan can be different than the ps plan (e.g., vesting, treatment of forfeitures, annuity requirement). Indeed the mp contribution is subject to the spousal consent requirement. The second reason for not making the contribution to the ps plan is that the merger/ conversion documents probably were not written to permit the last mp contribution to be made to the ps plan.

[KJohnson]

This is from the Corbel website:

What impact will the merger have on the funding of the money purchase plan?

The answer depends on the provisions of the money purchase plan and when the merger is effective. A contribution is not required to be made to the money purchase plan if the participants have been provided with an ERISA 204(h) notice on a timely basis and participants have not accrued the right to a contribution at the time of the merger.

The IRS has also informally indicated that there is not a deduction or minimum funding problem if a contribution for the money purchase plan is actually made to the profit sharing plan after the plans have merged. For example, suppose an employer maintains both a profit sharing and a 10% money purchase plan. The employer wants to merge the plans in 2002 but wants to retain the 25% deduction limit for 2001. Based on the informal IRS position, the plans could be merged as of January 1, 2002, and the employer could make the 10% money purchase contribution to the profit sharing plan by the due of the 2001 tax return.

[mbozek]

KJ: I guess the question is how much reliance can a client place on an informal opinion of unnamed IRS officials and who is going to tell the client that they can rely on this kind of answer as reported on the corbel website. Also the IRS cannot waive the spousal annuity rights of ERISA under the MP plan. As a famous movie character once said- do you feel lucky today? It really comes down to whether the employer's accountant will accept this answer.

[KJohnson]

I think it is pretty solid advice. The IRS gave the same advice at the 2001 ASPA conference as well as the Mid-Atlantic conference this past spring. I know that there were a number of employers who did "feel lucky" and followed this informal guidance. Although nothing is beyond the realm of possiblity, I doubt that the IRS would have any desire to try and put this horse back in the barn.

I agree that this does not change the "nature" of the contribution for 2001. It is still a money purchase plan contribution subject to QJSA rules, in-service prohibitions and the like. However, I believe that the IRS stated at the ASPA conference that any future forfeitures would not be so restricted.

[mbozek]

The issue is still one of reliance on this informal guidance--at every conference I have attended IRS officials who offer informal guidance state that they are not speaking for the IRS nor are their views binding on the IRS. It makes mo business sense to take evan a minimal risk of losing the deduction when the er can simply make the contribution to the MP plan and then transfer the funds to the ps plan. But then again it is not my call.

[KJohnson]

I think the IRS's comments were made in an attempt to resolve two business concerns of practitioners:

1) Some employers wanted to merge the plans effective 12/31/01 so that the 5500 for 2001 could be a final return. However, I never really saw an additional short-year 5500 as that much of a burden. Also I always wondered whether this would actually work and whether you would still have to have the merger on 1/1/02--thereby facing a one day short year.

2) Employers with standardized prototypes wanted to merge prior to the accrual of the money purchase contribution in 2002 (500 hours) which may have been before the due date of the 2001 contribution. (Of course they could have "frozen" the plan prior to the 2002 accrual, made the 2001 contribution and then merged the plans.)

This was really a non-issue for me. The vast majority of MPP plans that I have on our volume submitter have a last day/1000 hour requirement for a contribution and so they are only going through the merger or termination process now.

That said, if Wickersham or Holland express a view regarding an interpretation of the Code or the regs after seriously considering a question, I tend to sleep pretty easy in passing that intepretation on to a client.

[Blinky the 3-eyed Fish]

IAWKJ on this one. And I too have been sleeping easily knowing I have given this advice to clients. Except that one night when my dog was barking. I just couldn't get back to sleep so I ......