Merge Plans of parent and new subsidiary?

[Guest SJPrince]

I have a client who has its own 401(k) plan. Client recently acquired a subsidiary that has one also. In addition another subsidiary has a Simple IRA. Do these plans HAVE to be merged or the subs' plans terminated? If not, are there good reasons to terminate or merge them? Appreciate any help!!!

[QDROphile]

You cannot keep a SIMPLE and a qualified plan in the same controlled group beyond the section 410(B)(6) grace period. See section 408(p)(2)(D) of the Code. As for the qualified plans, they do not have to be merged if you can pass coverage and discrinimation tests (conducted on a controlled group basis) as separate plans.

[LCARUSI]

I agree with QDROphile.

However, why not merge the plans? What is achieved by maintaining separate plans - other than multiple 5500s and multiple audits.

The only situation I've seen where it might make sense to maintain separate plans is where a union group wants their own plan with its own pension committee.

[MWeddell]

One possible argument for not merging the plans is if you have to use the merger & acquisition transition period that's in IRC 410(B) because you're maintaining differing levels of benefits or contributions for the 1-2 year period after the corporate acquisition. That rule has never been incorporated into regulations so it's always been a little unclear whether one can still use it after plans are merged together, making it become a 401(a)(4) testing situation. That's a situation where you might want to keep the plans separate until you figure out how to pass the discrimination tests on an ongoing basis.

[Guest bswift]

I agree with QDROphile re the SIMPLE Plan analysis and that much is pretty clear. Dealing with 401(k) plans in the context of M&As is a challenge we have focused on for the last couple of years. While you probably could maintain two 401(k) plans at different levels, most companies just don't want to do that, prefering instead to maintain one plan for everyone. The big problem seems that, while the plan can be terminated after the transaction, the assets can't be distributed under 401(k)(10)(A)(i) if the purchaser continues to maintain the plan after the acquisition. However, for the future, if the acquired company's plan is terminated before the acquisition the assets can be distributed even after the acquisition (at least that's what the IRS has approved for us in a number of situations). Absent prior termination, merging the plans may be the only way to get rid of the sub's plan after the acquisition. Merging plans is not a monumental effort, except for the 411(d)(6) cutback issues. If the sub's plan permits annuity distributions and the parent's plan does not, you either amend the parent's plan to provide for those type of distributions or you don't merge the plans. Good luck.