Merger of non-safe harbor plan into safe harbor plan mid-year

[Guest sritts]

due to an acquisition, the plan sponsor of a safe-harbor 401(k) plan aquired a non-safe harbor 401(k) plan. Both plans are calendar year plans. The sponsor did not freeze benefits in the non-safe harbor plan prior to beginning of plan year. If they freeze the non safe harbor plan mid-year and merge with the SH plan, does the SH plan lose the SH treatment and have to be tested?

[Tom Poje]

no one knows for sure as the regs are silent on the issue (they haven't been addressed at this point in time 1.401(k)-5 is for mergers, acquisitions but is simply 'reserved' at this time.

I'd lean toward that the safe harbor will exist, the plan before the acquistion would have to be tested through the date of acquistion, but then I'm half out of mind, so my opinions might not be worth trusting.

[Guest sritts]

no one knows for sure as the regs are silent on the issue (they haven't been addressed at this point in time 1.401(k)-5 is for mergers, acquisitions but is simply 'reserved' at this time.

I'd lean toward that the safe harbor will exist, the plan before the acquistion would have to be tested through the date of acquistion, but then I'm half out of mind, so my opinions might not be worth trusting.

thank you. Would your answer change if the acquisition date was prior to the beginning of the plan year? Acquisition date 12/16/10. Plan year beginning date, 1/1/2011. Proposed merger date 4/1/11.

[rcline46]

My advice would be to NOT merge the plans until 1/1/2012.

[Tom Poje]

you are getting in over my head. for instance,

disregarding the merger of the plans, is everyone eligibile for the safe harbor at the beginning of the year since the acquistion took place just before the beginning of the year?

[Guest sritts]

you are getting in over my head. for instance,

disregarding the merger of the plans, is everyone eligibile for the safe harbor at the beginning of the year since the acquistion took place just before the beginning of the year?

The employees from the acquired company are still participating in the non-safe harbor plan and the intent is to merge the plans April 1 and they will participate in the purchasers safe harbor plan.

[Tom Poje]

but if I am working for Company B and it is bought by company A, and company A's plan has immediate eligibility (or recognizes past service with company B) then it seems to me I should be eligibile for A immediately...but then thats why I let others decide whats going on with mergers and stuff to make sure everything is spelled out.

[ESOP Guy]

Your client needed to get advice from a good ERISA attorney back when he was working through the business buy. A little money spent then would have saved him now.

First, you need to go back to the advice of not merging the plans until 1/1/2012. If you have access to Sal’s ERISA book he has a good coverage over the transition period one MIGHT have in this situation. In many cases the two plans can be tested as separate plans in the year of acquisition and the whole following year. So in this case it would be for pye 12/31/2010 and pye 12/31/2011.

Those rules were made before Safe Harbor plans existed so it is less than 100% clear how it would work in this situation. That problem could use an attorney’s advice. But if the same logic is followed it would seem like you could just test the non-Safe Harbor plan stand alone and the Safe Harbor plan stand alone. I know what happens when one assumes logic and Qualified Plan law.

More importantly the ERISA attorney could help you with other issues. For example, why would you want to merge the other company’s plan into the buyer’s plan? What if that plan has a disqualifying defect? All you are doing is merging that defect into the buyer’s plan.

Terminate the seller’s plan, pay the people out, make them eligible to the buyer’s plan 1/1/2012. No chance of importing another plan's defects into your plan.

I am doing this from memory. So I would recommend getting the help from someone who has experience of Qualified Plans and business merger issues. I don’t recall ever merging the plans just because of the plan defect risk. I do recall using the transition period on a regular basis.

[Jim Norman]

At the LABC two weeks ago at the M&A session by Ilene Ferenczy and Rhonda Migdail (of IRS), this came up. Both agreed that SH and non-SH (k) plans cannot be merged mid-plan year.

[John Feldt ERPA CPC QPA]

Can the plans operate as they were until the end of the 410(b)(6)© transition period?

[Jim Norman]

If they are otherwise eligible for the transition period, sure. This was another takeaway from that session, that a plan amendment could blow the transition eligibility even if it is not substantially changing coverage. The code conditions eligibility on not substantially changing coverage or other requirements specified by treasury. The regs mention changes in the plan or changes in coverage.