Termination vs. merger

[chris]

Bank is directed trustee on 401(k) plan w/ 3% safe harbor/NEC and deferrals. There are no psp contributions in the plan. IN other words, everything is 100% vested. Bank is advising client to merge instead of terminate the 401(k). Looks like to me a way to hold onto the assets and trsutee fees....??? Generally, from the e/er perspective the main benefit of merging vs. termination is that the participants do not become 100% vested in a merger, but that is not applicable in this situation. Anyone see any other benefits to merging vs. terminating? Thanks.

[david rigby]

Merging can be the best action in some circumstances. Terminating can be the best action in certain circumstances.

But you have not described any of the circumstances.

[chris]

E/er is a medical practice and has had a number of doc's leave over the past few years. As the doc's left the staff numbers also lessened. Thus, e/er is paying admin fees, etc... with respect to the 401(k) plan for a much smaller number of participants. The main shareholder is older and is close to retiring and just so happens that business is not as good as it was a few years back. In short, the e/er/medical practice may dissolve within the next year or so. 401(k) plan was a positive from the benefits perspective when it was added b/c it aided in recruting doc's; however, now that majority of doc's are no longer there and main shareholder is looking to close up shop relatively soon the expense of the 401(k) has become burdensome. Again, my initial reaction is that bank wants to hang onto the assets and the fees......

[Bird]

Merging into/with what?

[chris]

PSP or MPPP that E/er currently maintains.....

[Guest Pensions in Paradise]

You are comparing apples to oranges. Merging means to consolidate two or more plans into one plan. Terminating means to permanently close down the plan.

So the bottom line is what does the client want to do. Consolidate their plans or shut them down altogether?

[chris]

Comparing apples to oranges....???? I understand the definition of merger vs. termination. Read the first post and the follow-up post as to your question. E/er wants to terminate the 401(k) but wants to keep frozen MPPP and active PSP. Bank is proposing that E/er merge the 401(k) into one of E/er's other plans. E/er may also consider filing a 5310 as to the termination. I was just looking for reason why bank might be advising merger rather than termination.....

[Bird]

So they have three plans when one could have served the purpose for the last 4 years or so. I think I'd be more inclined to merge the others into the 401(k); you at least give the employees the option of making deferral contributions if they want. Of course, maybe nobody cares. But if the business is likely to wrap up within a year or so, maybe they should think about terminating all of the plans.

[Bird]

...but I guess I didn't really answer the question. A merger is generally, in my experience anyway, less expensive than a merger. And in a termination, the participants will be taking distributions; in a merger, the money is just transferred to the other plan. I'd be inclined to think a merger is sensible in this situation.

[Guest Pensions in Paradise]

Excuse my prior response. Its just that you asked such a simple question I assumed you didn't understand the difference between a merger and a termination.

As Bird said, the merger would be the most cost-effective alternative for your client. Merge the PS and MP plans into the 401(k), and then terminate the 401(k). That will only require one 5310 submission versus three.

Now the more important question. Who advised them to keep three plans in place for the last five years? They could have merged the PS & MP into the 401k and saved a bundle on admin fees.

[david rigby]

There could be other issues, such as whether one or more of the plans has any "clouds" hanging over it (prohibited transactions, for example). If so, a merger may not be the best action.

But PIP and Bird are correct that a merger is much simpler and cheaper than a termination. Also, merging the plans will maintain a larger asset base, which could provide investment flexibility.

[Appleby]

But with a merger, when a MPPP is involved, wouldn't there be separate accounting requirements? Which would not apply if the MPPP was terminated?

[chris]

PIP: E/er started out with a MPPP and PSP years ago. Because of various internal governance issues E/er wanted 401(k) to be a separate, stand-alone plan. With EGTRRA I advised E/er to get rid of the MPPP by way of merger or termination (just get rid of it), but E/er wanted to maintain it b/c of particular investment returns or some other reason. Couldn't get E/er to address the issue of duplication of admin fees, filings, etc... by having three plans. As for my initial question I was curious as to what other alternatives to termination (besides a merger) the bank/directed trustee might have in mind. I liked your suggestion of merging all into one and then terminating the last one, but the resulting determination letter wouldn't be able to cover the prior plan mergers would it? The E/er (medical practice) is very conservative and would probably opt for doing a 5310 for each plan?

PAX: With respect to the larger asset base issue since the E/er maintains another defined contribution plan it appears the 401(k) assets would have to be transferred to one of the remaining DC plans and those assets could not be paid out to the participants.

APPLEBY: You are correct, Rev Rul 94-76? requires the separate accounting for MPPP assets held w/i PSP.

Assuming E/er wants to let MPPP and PSP remain in place and since the 401(k) assets would have to be transferred to one of the remaining plans and knowing what little I have been able to provide here does anyone see any additional benefit from terminating the 401(k) and seeking a FDL on it vs. merging it? Please forgive me for throwing out the question again....

[Bird]

A merger is a continuation of both (or all) prior plans, but as one resulting plan. Theoretically, if a FDL is requested upon termination after a merger, the IRS is ruling on all of the plans that led to the final plan. I see no advantage to terminating vs. merging...well, I guess if there are different distribution options (annuity options in the MP vs. maybe not in the others), and given the general bumbling that I sense, it might actually be easier to process all of the plans separately (i.e. as terminations).

I don't know whose fault it is, but is sounds like the employer has made some bad decisions, or non-decisions, that have led to (probably) superfluous fees. I'm (still) having a hard time understanding the obsession with keeping the MP and PS plans as is and am wondering why someone hasn't slapped him/them upside the head and asked "what exactly do you want to do here" so he/they could be advised properly.

[chris]

"You can lead a horse to water but you can't make him drink." Except for the slapping, E/er has been advised properly a number of times as to the admin. fees issue and to merge/terminate the plans to resolve it.

[Guest Pensions in Paradise]

Ok, so we've established that the client has 3 plans (401k, PS, MP) and that for the time being they will not terminate the PS and MP plans. So the question is what should they do with the 401k - merge or terminate.

The only viable answer is to merge the 401k into the PS. Why? Because even if you terminated the 401k you would still have to transfer the assets into either the PS or MP plan because of the successor plan rules. So in effect you will be merging the 401k into the PS/MP anyway.