Two 401(k) Merger Questions

[Guest kjk]

I have two separate questions:

1. If a prototype 401(k) plan with a GUST Remedial Amendment period ending in 2003 is merged into an individualized 401(k) plan that has already been updated for GUST (2/28/02) is there a problem? That is, how does the prototype plan get updated? Do you wait and sign a new prototype adoption agreement for the period prior to merger when it becomes available or do you prepare an individualized snap-on amendment to the prototype prior to merger? Or do you do nothing?

2. When one corporation acquires another corporation and 401(k) plans are involved, is it more advantageous (for purposes of avoiding liability for operational defects) to merge the plans or to terminate the acquired company's plan and transfer its assets trust-to-trust? Or perhaps one option is not more advantageous than the other?

Thanks. Any citations would also be greatly appreciated.

[mbozek]

1. Merging the proto type into the qualfied plans eliminates the need to make gust amendments provided that all of the gust amendments appicable to the p type plan have been already made to the individual plan. If not then the Individual plan must be amended on the date of the merger for provisons that are different for the P type plan. In any event the terms of the p type plan must be reviewed to avoid inconsistent provisions , e.g. vesting on employer contributions for account balances in the p type plan.

2. It is better to merge since termination may prevent participants of the terminated plan from making 401(k) contributions for 1 year after termination. Also a merger does not ususlly require IRS approval whereas a termination will require IRS submission and attendent costs. Why cause disruption to the partcipants of the acquired plan by terminating their plan- Just merge the plans. The only reason for not merging the plans is if the acquired co plan has a disqualfiying provision in which case it may be advisable to terminate the plan or delay the merger until the defect is fixed. The due dilligence process should provide for a review of the operation of the the 401(k) plan.

[Guest kjk]

Thanks for your response. With respect to the merger vs. plan termination issue, a determination letter is not required upon termination is it? Also, why would participants be prohibited from making elective deferrals following a termination? Wouldn't termination have the advantage of cashing-out those employees who are not continuing on as employees? Also, wouldn't termination limit the surviving plan's liability for any qualification issues in the terminated plan?

[Kirk Maldonado]

MBozek:

I thought that the one year suspension didn't apply if the target company terminated its plan the day before the consummation of the transaction.

[Guest kjk]

What if the plan transaction is taking place outside of the M&A context. In other words, what if a parent company and its subsidiary have always maintained separate 401(k) plans but now the parent wants to either terminate the plan or merge the sub's plan into its own plan--is one course of action better than the other (for purposes of avoiding liability for possible operational defects in the sub's plan)? Or is it that because we are talking about a controlled group situation, the parent is already liable for the sub plan's defects (if any)? Anyway, there would most certainly be a "successor plan" if the parent has a 401(k) plan, right? (given that the definition of "employer" includes all controlled group members).

[mbozek]

Kirk: I think I said "may prevent" participation--Feel free to explain the conditions when the plan may be terminated without preventing participation in a sucessor 401(k) plan. Since termination will require that forfeitures be allocated, all participants be 100% vested in plan assets and participants be given the opportunity to elect a distribution as well as cost of obtaining a determinaton letter it is usually better to merge.

I thought that the IRS has adopted a dont ask dont tell policy toward plan transfers -- a receiving plan need only obtain a statement from the transferring plan that it is qualfied to prevent sanctions if the transferring plan was not in compliance with 401(a). It is not necessary to terminate a qualifed plan in order to transfer assets to avod issues regarding the transferring plans qualified status.

[Guest Bud]

Terminating a plan is better then merging because distributions from a terminated plan will be purged of BRFs. Merged plans will have to preserve 411(d)(6) protected benefits.

Also, termination provides better protection from receiving disqualified assets. If Plan A merges into Plan B, then Plan A is audited and disqualified, Plan A assets taints the merged Plan B and possible disqualifies it. If Plan A assets are distributed upon plan termination and rolled over to Plan B, then Plan A is audited and disqualified, only the rollover accounts are tainted and disqualified. It doesn't taint all of Plan B.

Going back to the first response, merging a pre-GUST M&P plan into a GUSTed indiv plan does not eliminate the need to amend the pre-GUST M&P plan. How the pre-GUST M&P plan operated during the remedial amendment period has to be memorialized somehow. You could do that with a GUST snap on appendix to the indiv plan which amends the merged M&P plan or you can adopt another GUSTed M&P doc. I've been doing the latter because my company goes through several acquisitions and I don't want my indiv plan to have dozens of appenda. By the way what I said is in the IRS website has a Q&A on merged plans and was answered by an IRS rep who spoke during the Q&A session of the ABA section on employee benefits, Spring 2001.

[mbozek]

Bud: I though the IRS issued regs that permit a ps plan to eliminate all optional forms of benefits except a lump sum by amending the plan and providing notice to the employees. The issue with preserving benefit forms exists when a money purchase plan is merged with a 401(k)/ps plan. Proper review of the plan to be merged during the due dilligence process will usually uncover any disqualification issues and in any event the IRS policy is to avoid disqualfication of plans. I have never seen the IRS audit a plan after it had recieved a favorable determinaton letter upon termination.

[Guest Bud]

Mbozek: I agree, which supports my preference to terminate rather than merge.