MP Merger w/401(k) Plan

[Guest MEWilson]

MP Plan was amended to 0% and merged w/401(k) Plan effective 10/15/2002. 204(h) Notice was given timely. Question: If there was 1000 hours and last day requirement to receive MP contribution, does the employer still have to fund the MP under the old formula? Or is the contribution not required because of the last day requirement?

Thank you

[Blinky the 3-eyed Fish]

It depends on what the effective date of the amendment to reduce the accrual rate to 0% is. In this case the last day of the plan year is 10/15/02, so if the amendment was signed and effective before then, then no contribution.

[Guest MEWilson]

Thank you!

[E as in ERISA]

Blinky --

It is my understanding that, while practitioners believe that is the conclusion that the IRS would reach based on similar rulings, there is actually no rulings from the IRS in the merger area that confirms that result. I.e., there is some risk in this approach and it may be advisable to obtain a ruling if the circumstances warrant (e.g., large dollars involved, adversarial workforce, etc.) Agree?

[Blinky the 3-eyed Fish]

Katherine, what possible conclusion could you envision the IRS reaching?

[E as in ERISA]

Maybe I should just say, "Where's the legal basis for your conclusion?" But I'm not saying that I disagree with it -- or even that the IRS would disagree. I'm just saying that we don't currently have any guidance re how the IRS will rule in a merger situation.

My understanding is that we only have guidance re termination and freezing. Those are clearly different from a merger. Depending on the circumstances, it's possible that the IRS could say that the funding requirements still apply because the merged plan was still in existence at plan year end (albeit in a different form) and the participants were still employed on that date.

My greatest concern is that there are no standard "merger" terms. I've seen many very poorly drafted merger documents. Some that don't even have legally operative terms that actually effect the merger (e.g., they only state the intent to merge, but don't really even actually merge). If the details of the merger transaction and the transition aren't explicitly spelled out, the IRS could fill in the gaps however it wants.

[Blinky the 3-eyed Fish]

I see your point, but in this case an amendment to the plan reducing accruals to 0% was adopted. So, any issue of extending the plan year end would not apply in this circumstance.

[E as in ERISA]

So they merged the plans as of 10/15/2002 and for reporting purposes, they have a short plan year of 10/15/2002 for the MP. That doesn't necessarily mean that you have a "plan year end" for purposes of the MP accrual. It may depend on the precise wording in all the documents. What if both the old and new documents (and the SPDs) say that participants have to be employed as of plan year end to receive the contribution for the year, but both the old and new documents (and the SPDs) define the "plan year" to end on 12/31. If the amendment and notice aren't clear enough about how the 10/15/2002 "merger date" affects the accrual of benefits for the year, then I believe that the IRS (or a court) could decide that employees who were there on 12/31/2002 were entitled to a contribution for 2002.

[E as in ERISA]

There's a major document provider who has a sample merger package available on the web. The sample MP to PS merger says something to the effect of "Whereas employer wishes to merge the MP and PS and transfer all the account balances from the MP to PS....Now therefore the MP trustee shall transfer all of the assets of the MP to the PS trustee (and some details about accounting for the balances but nothing about the PLANS actually being merged!)...The merger shall take place as of ____, 20__." It leaves a lot to be desired in terms of what happens to the allocation for the year....

[Guest Pensions in Paradise]

Sorry Katherine, but I don't understand what the problem is.

Let's pretend the MP plan was not merged into the 401k but was an ongoing plan. The MP plan has a 1000 hour / last day rule. Sponsor amends formula to 0% prior to the last day of the plan year. MP plan is in existence on the last day of the plan year, but no contribution is required.

So why does the merger change anything?

[E as in ERISA]

It's all a matter of the drafting. When you are only reducing the accrual to 0%, you are likely to have language in both the amendment and the notice that specifically says that you are reducing the accrual to 0%, and the IRS has issued guidance that makes it clear what the results are in a termination or frozen plan. When you are merging the plans (with a resultant reduction of the accrual to 0%), then it is possible (probable) that neither the amendment or the notice even mention anything about the accrual (they often just state that the merger and transfer of assets are occuring) and the IRS has not issued guidance about what the results are. I think that with a very poorly drafted merger amendment, either the IRS or a plaintiff's attorney has more room to argue that an accrual is required for the year of merger. I'm not saying I agree with that conclusion. I'm just saying that it is riskier, because the language is less specific and there is no guidance. It may depend on the specific language. If there are significant sums of money involved or there is a hostile workforce, then it could be beneficial to obtain a ruling confirming that the IRS agrees that no accrual is needed.

[david rigby]

Sometimes both form and substance are of extreme importance.

[Lynn Campbell]

If the merger documents specify that a contribution will not be made and the rationale for that decision, wouldn't that help to cover the bases?

[Guest pjb]

Make sure the 204(h) notice explains when the money purchase obligation ceases. It sounds like the one already sent out didn't.

[Guest PORTE]

What does a last day of the year rule have to do with this argument? I don't think anyone said the employees were terminated and doesn't changing the contribution rate to 0% after the participants have reached 1000 hours seem to be a violation of the anti-cutback rules? Isn't that the real issue?

[Blinky the 3-eyed Fish]

Question: If there was 1000 hours and last day requirement to receive MP contribution...

The participants don't accrue the right to the contribution until they work 1,000 hours AND are employed on the last day of the plan year, so sorry, but that is not the real issue.

[Lynn Campbell]

If the Plan has the 1000 hour rule and the end of year requirement, one could take the approach that no participants have accrued a benefit until they satisfy both requirements, and that is the justification for making no contribution to the Plan if amended before year-end.

[E as in ERISA]

Exactly. I think that the IRS has made it pretty clear that in the context of a termination, you don't have to make a contribution for that final year. And although there is no official guidance at this point, most believe that the same is true for a merger. I tend to agree.

My only concern is that in a merger, the plan is actually continuing and employees are still employed on the last day of the plan year and they are continuing to earn credited service under the plan, etc. In certain situations, there is the potential for the argument that the result should be different than in a termination. So when large sums of money or a hostile workforce are involved, it wouldn't be a bad idea to go in for a ruling and get the IRS to issue guidance on the merger issue.

[Blinky the 3-eyed Fish]

Katherine, you do agree though, that in this case where the allocation formula was amended to 0% before the merger date, that your stance is a non-issue; in other words, no contribution is required period? To me your posts are well taken, but not applicable to this case.

[Lynn Campbell]

When a Money Purchase Plan merges into a Profit Sharing Plan, what, if any, consent is required by participant and spouse? Thanks for all input!

[Blinky the 3-eyed Fish]

Nothing is required from the participants.

[Earl]

Unless you want to get rid of J&S