Plan Terminations

[Guest Karenm]

I am working with a medical practice that will be acquired in an asset acquistion by a non-profit organization in the very near future. The practice has a 401(k) plan and the doctors do not want to roll those accounts to the new employers plan, or into an IRA where the law will not protect the assets from creditors.

If the medical practice fails to liquidate following the sale of all it's assets, could the practice still sponsor the plan and make distributions to doctors come retirement (noting filing requirements, costs, etc).

Does the fact that the employees will sever employment require the distribution of accounts?

The problem I have is that the doctors want their accounts to remain in the 401(k) plan, DFA Fund options and are willing to pay a pretty high cost to maintain the plan in order to accomplish that goal. To date, they have already spent a huge amount of money asking these questions of their TPA and not getting an answer they are comfortable with.

I appreciate any help.

[Guest Kabert]

Termination of employment does not require distribution. From my brief perspective, I'd think their options are:

- keep plan running but have it sponsored by the new employer or the new version of the original practice.

- terminate the plan and distribute to IRAs.

- terminate the plan and roll to the nonprofit's plan (but you said they don't want this option)

It doesn't sound to me as though the plan is really an "abandoned plan" under those rules issued by the IRS a year or so ago. Rather, it sounds as though the employees want to keep the plan, they just don't want to deal with its hassles. Why not adopt a prototype plan from Fidelity or Merrill Lynch? Of course, anything they want to do with this plan, as long as it's an ongoing plan and not frozen, will need to be coordinated with benefits at the nonprofit org level.

Good luck

[Guest Karenm]

Termination of employment does not require distribution. From my brief perspective, I'd think their options are:

- keep plan running but have it sponsored by the new employer or the new version of the original practice.

- terminate the plan and distribute to IRAs.

- terminate the plan and roll to the nonprofit's plan (but you said they don't want this option)

It doesn't sound to me as though the plan is really an "abandoned plan" under those rules issued by the IRS a year or so ago. Rather, it sounds as though the employees want to keep the plan, they just don't want to deal with its hassles. Why not adopt a prototype plan from Fidelity or Merrill Lynch? Of course, anything they want to do with this plan, as long as it's an ongoing plan and not frozen, will need to be coordinated with benefits at the nonprofit org level.

Good luck

[Guest Karenm]

Wow, the things I fail to consider are scarey, it is great to have back up. Why would Co B, the acquiring business, be concerned with the Co A's sponsorship subsequent to the asset acquisition? The doctors will be employees of a non-profit following the acquisition; are the controlled group rules the reason for concern by CO B? Would the doctors have to be board members for that to be an issue? Something tells me I missing something much bigger here like unknow liability to Co B.

Co A (or a Co we replace with Co A) will not have any employees and would not provide any services it would only exist to avoid the termination of the plan and distribution of it's accounts.

I did not think it was possible just to freeze the K plan, but in effect that is what we are trying to do here; no contributions, just earnings and accounts, filing requirements and at some later date, distributions.

I just thought of an another related question but decided I should wait and confirm that I have not already out stayed my welcome.

Thanks again for all you help.

[Peter Gulia]

Karenm, you mentioned that the anticipated business change is an asset sale. This suggests that your inquirers remain the shareholders, members, or partners of the corporation, company, or partnership that maintains the plan that your inquirers want to keep. Those who control the corporation, company, or partnership could maintain it and cause it to maintain the 401(k) plan - with each of your inquirers not taking a distribution until he or she chooses to, or the plan's MDIB provisions force a distribution.

Although it's not part of your charge, your inquirers' investment and creditor-protection reasons for keeping the plan might make sense in their circumstances.

[Guest Karenm]

Karenm, you mentioned that the anticipated business change is an asset sale. This suggests that your inquirers remain the shareholders, members, or partners of the corporation, company, or partnership that maintains the plan that your inquirers want to keep. Those who control the corporation, company, or partnership could maintain it and cause it to maintain the 401(k) plan - with each of your inquirers not taking a distribution until he or she chooses to, or the plan's MDIB provisions force a distribution.

Although it's not part of your charge, your inquirers' investment and creditor-protection reasons for keeping the plan might make sense in their circumstances.

[Mike Preston]

There are indeed issues here that your client should be aware of. I certainly don't think you are missing anything as far as liability for Co. B. If it is an asset sale, barring controlled group or affiliated service group issues, Co. B is pretty much insulated from any liability associated with the plan of Co. A.

However, if Co. A (post asset sale) really and honestly does absolutely nothing, I have concerns about the ability of the entity to continue sponsorship of Co. A's plan. Perhaps we shouldn't be speculating about IRS positions not yet taken, but it wouldn't surprise me to have the IRS come out with rules that obliterate Co. A's ability to continue sponsorship at some point. Have they, to date? Not really. But, then again, maybe.

This is why I think Co. A needs to engage ERISA counsel for advice that can only be given after understanding all of the facts.

Getting back to what the IRS might pick on, there is a requirement in a k plan (since it is a PS plan) that there be substantial and recurring contributions. That won't happen under what you describe.

The conventional response to this issue has been to terminate the k plan and roll (or voluntary transfer) the benefits to a 0% money purchase plan, which does not have the substantial and recurring contribution requirement, but has issues of its own - such as the long term likelihood that the MP provisions will even survive in the IRC.

Of course, there are some who might argue that the substantial and recurring requirement is not applicable when the entire entity has no employees with any compensation which would justify a $0.01 contribution. But would an IRS auditor agree? Back to my ERISA counsel suggestion.

An alternative approach would be to have Co. A establish an ongoing business concern of some sort. Doesn't have to be something that is intended to set the world on fire, I've never met a group of doctors that didn't have a number of projects going. Perhaps one of them might fit the bill?

Keep in mind that if the ongoing entity is charged with maintaining the plan, there are fiduciary concerns that go along with that which might lead to tension at some point. Cost of compliance has been mentioned, but not in the context of fiduciary liability.

All in all, I've seen it done, but it is not for the faint of heart.

[Guest Karenm]

There are indeed issues here that your client should be aware of. I certainly don't think you are missing anything as far as liability for Co. B. If it is an asset sale, barring controlled group or affiliated service group issues, Co. B is pretty much insulated from any liability associated with the plan of Co. A.

However, if Co. A (post asset sale) really and honestly does absolutely nothing, I have concerns about the ability of the entity to continue sponsorship of Co. A's plan. Perhaps we shouldn't be speculating about IRS positions not yet taken, but it wouldn't surprise me to have the IRS come out with rules that obliterate Co. A's ability to continue sponsorship at some point. Have they, to date? Not really. But, then again, maybe.

This is why I think Co. A needs to engage ERISA counsel for advice that can only be given after understanding all of the facts.

Getting back to what the IRS might pick on, there is a requirement in a k plan (since it is a PS plan) that there be substantial and recurring contributions. That won't happen under what you describe.

The conventional response to this issue has been to terminate the k plan and roll (or voluntary transfer) the benefits to a 0% money purchase plan, which does not have the substantial and recurring contribution requirement, but has issues of its own - such as the long term likelihood that the MP provisions will even survive in the IRC.

Of course, there are some who might argue that the substantial and recurring requirement is not applicable when the entire entity has no employees with any compensation which would justify a $0.01 contribution. But would an IRS auditor agree? Back to my ERISA counsel suggestion.

An alternative approach would be to have Co. A establish an ongoing business concern of some sort. Doesn't have to be something that is intended to set the world on fire, I've never met a group of doctors that didn't have a number of projects going. Perhaps one of them might fit the bill?

Keep in mind that if the ongoing entity is charged with maintaining the plan, there are fiduciary concerns that go along with that which might lead to tension at some point. Cost of compliance has been mentioned, but not in the context of fiduciary liability.

All in all, I've seen it done, but it is not for the faint of heart.

[Guest Karenm]

Mike

I really appreciate the detail. Thank you