410(b) coverage during partial termination

[Pension Panda]

Anyone encounter this before?

Employer is planning on selling the company as an asset sale in 2008. All employees will be terminated from the employer by 3/1/08 and none will work 500+ hours prior to termination. Partial termination of the plan will occur. The two partners will be closing down operations over 2008 & 2009 collecting self-employment earnings off K-1s. Is there any problem passing 410(b) coverage in 2008 if none of the terminated employees get a 2008 profit sharing contribution? None will have worked over 500+ hours, so no 410(b) coverage failure right? Am I missing anything else?

[Jim Chad]

I was hoping one of the smart people would reply. They didn't so here goes:

Let's see if I have the picture right. The company is laying off everyone except the owner and selling all assets. The owners will continue to work for the company to collect receivables and oversee the moving company taking stuff out. The owners will be the only ones still employed on last day and the only ones with greater than hours. Since you can exclude from coverage anyone terminated with less than 500 hours you are thinking you have an automatic pass on coverage.

I agree.

[austin3515]

Not so fast...

I think what you will find in the regs is that the TWB exception applies only if the sole reason they did not get a contribution was because they terminated employment, provided they worked less than 501 hours. I'm not sure what you've described fits the bill in that regard. I.e., in your scenario the real reason they;re not getting the contribution is because the owner sold the company.

Who knows, maybe it does, but I'd check that one twice before excluding every NHCE.

[david rigby]

A partial termination is obvious from the facts stated. But why not freeze and/or terminate the plan?

You can be sure the employees will be asking for a distribution of some kind, and won't want to wait until 2009.

[austin3515]

I had some time to fish out the reg... It's the use of the word "solely" that gives me pause.

§ 1.410(b)-6 Excludable employees.

(iv) The employee fails to accrue a benefit or receive an allocation under the plan solely because of the failure to satisfy the minimum period of service or last-day requirement,

[Pension Panda]

Thank you for the replies. I too am thinking this sounds too good to be true, and therefore must be missing something. The owner doesn't want to freeze the plan because he wants his contribution for 2008 and if they can pass 410(b) then he can have it. I placed a call to the IRS just to double check. All employees are separating from service from Employer 1 and may/may not become employees of Employer 2. Since they did away with the "same desk rule" the employees of Employer 1 are now terminated and a distributable event has occurred so payout is eminent. Unless once again I'm missing something. Wouldn't be the first time...

[austin3515]

Let me get this straight--you're going to call the IRS for guidance?

I don't recommend that course of action unless, you're getting a provate letter ruling, or you happen to have in with some very high ranking employee plans agent. You're better off with an ERISA attorney.

[Belgarath]

Panda - FWIW - I would not read anything extra into the 1.410(b)-6(f)(1)(iv) exclusion. If the employees actually terminate employment with less than 500 hours, the reason is immaterial. I agree that you should be ok.

[Jim Chad]

Austin Were you saying to check the document?

For example if all employees paid on commision were excluded in the Plan document and there was 1 salesman, the following would occur:

100% of the HCE's receive a benefit

1 NHCE is not excludable and 0% of the NHCE's receive a benefit.

This Plan would fail coverage.

Is this what you were getting at?

[ak2ary]

I agree with Jim...even if the salesman also terminated with less than 500 hours, if he was in an ineligible class but satisfied 21&1, he would not be excludable ... that, I think, is the point of the word solely (although the IRS is very quiet about the reason for "solely ")

I wouldn't be concerned if all the employees were eligible to share in the contribution but terminated with less than 500 hours and did not share due to a last day rule. In that case, they are all excludable for the year