Company Merger - 401K Termination?

[Guest Jodi]

I have a question regarding a company merger. An S Corp with a 401K plan is merging with a sole proprietor without a 401K plan into an LLP. The employees of both the S Corp and Sole Proprietor will become employees of the LLP. However, the 100% shareholder of the S Corp and the sole proprietor will continue to receive salaries only from their respective companies ( S Corp and Sole Proprietor). My questions are:

1. Does the S Corp's current 401K Plan need to be terminated or can the LLP take over the existing plan?

2. Once the LLP has a plan, can (and how can) the S Corp owner and the sole proprietor be participants in the LLP's 401K Plan if they receive no compensation from the LLP?

Thank you.

[QDROphile]

In order to get to your questions, you have to start over. An S corp cannot merge with a sole proprietorship or into an LLP. Merger is a corporate concept. When you are dealing with noncorporate entities (sole proprietor, LLP)the form of the transaction is reallly something else. The "something else" will have a lot to say about what the real relationships are among the former sole proprietor, S corp, and S corp shareholders. Until you can describe the real relationships among the components of the LLC you cannot address your questions. Among other things, the answers to your questions depend on things like control over related entities and the nature of the relationships. These relationships should be specified in your LLC agreement.

[Guest Jodi]

I'll try to explain the situation to the best of my knowledge. An S corp and a sole proprietor are forming an LLP. The S corp and the sole proprietor will be the partners (85% to S corp and 15% to sole proprietor). The S corp has one shareholder with 100% of stock. The S corp currently has a 401K Plan. The sole proprietor has no DC or DB plan in place. Maybe this can help with any assistance to the above questions. Thank you!

[QDROphile]

Under the right circumstances, the existing 401(k) plan could serve all of the employees of the LLP and related entities. That may have to be done with a multiple employer plan instead of a single employer plan. But the situation you describe is still too perplexing. The LLP is the employer but doesn't pay its employees anything? The characterizations of the relationships need explanation. What is needed is a comprehensive review of all the facts, including details of the LLP agreement. This forum is not condusive to that kind of inquiry, and I am bowing out. I am sorry if I have served only to tease or confuse.

[Guest John Smith]

Let me see if I can help clarify the circumstances. Based on what you have written,the following would be my understanding of the situation: Firstly, an S Corp cannot own more than 80% of another entity. Additionally, an S Corp cannot own any part of an LLP unless that LLP has elected to be taxed as a corporation. Therefore, this is my guess as to what is happening: The LLP will have two partners. The partnership agreement will provide that the individual that formerly was the sole S Corp shareholder will have an 85% stake in the LLP and the individual that formerly was the Sole Proprietor will have a 15% stake. The LLP will now be the sole shareholder in the S Corp. The former S Corp shareholder will remain an employee of the S Corp, all other former S Corp employees will move over to the LLP. The Sole Proprietorship will cease to be a stand alone entity. (Its operations will become a part of the LLP.) The LLP and the S Corp will constitute a parent - subsidiary controlled group. The S Corp can continue to maintain its plan with its single employee as the sole participant. This will last until the first day when the plan will fail coverage testing. Alternatively, the LLP can join the plan as a participating employer or take over sponsorship of the plan. In either case the employees of the LLP will be eligible for the plan.

[Guest Gary Tencer]

1. Does the S Corp's current 401K Plan need to be terminated or can the LLP take over the existing plan?

I would recommend the LLP adopt the Plan as the new sponsor or adopt as an adopting employer, keeping the S-corp as the sponsor and administrator. Make changes on the page 1 of Form 5500-C/R complete Q3.

2. Once the LLP has a plan, can (and how can) the S Corp owner and the sole proprietor be participants in the LLP's 401K Plan if they receive no compensation from the LLP?

The sole proprietor is now a member and his compensation is allocated net profits of 15%.

The S-corp owner should take wages from his S-corp. Have the S-Corp continue participation in the plan.