Merger of 401(k) with ESOP

[J. Bringhurst]

Does anyone have any potential issues with the following situation:

Client has Plan A, which is a 401(k) plan (calendar year plan year) with discretionary matching contributions. Client also has Plan B, which is an ESOP (also calendar year plan year).

Prior to 1/1/04, client wants to merge Plan A with and into Plan B and create a safe harbor KSOP (they're not yet sure which safe harbor contribution method to use). We're preparing a transition memo describing the applicable steps, and I was just hoping someone might be able to come up with some issues I've not yet covered.

So far, I've covered (1) corporate action (i.e., merger resolutions, removal of 401(k) plan trustees, etc.), (2) plan amendments and drafting (re: service crediting and protected benefits issues), (3) testing, (4) notice requirements (safe harbor and blackout notice), (5) safe harbor alternatives, and (5) Form 5500 filings.

[Guest KB]

Our company has maintained an ESOP with 401k and match (not safe harbor) since 1998. If the ESOP portion of the combined plan is not going to be vested immediately (as is the case with ours), one issue we've found troublesome administratively is when to forfeit nonvested balances from partially vested participant accounts. Even though a terminated employee may have all salary deferrals and match allocated to his account that he or she is entitled to, the ESOP contribution allocation has always taken longer to complete because of determining eligibility (last day worked, hours). Participants who have taken distributions soon after their last pay in the earlier part of a plan year do not have the nonvested portion of their account forfeited necessarily upon distribution since not all dollars credited to them have been allocated to their account at the time of distribution (they were eligible for an ESOP allocation that doesn't get allocated until after they request distribution).

But if all money types are fully vested immediately, no issue!