Safe Harbor 401(k) termination - how far in advance?

[Sully]

Client has a calendar year safe harbor 401(k) Plan and was scheduled to sell their ownership in the company and terminate the 401(k) plan on June 30th. This would be a plan termination due to a Section 410(b)(6)© transaction. At the last minute the sale was postponed until July 31st. The client would still like to use the June 30th plan termination date. My concern is whether or not they can continue to rely on the safe harbor rules for this plan year if the plan termination is 31 days in advance of the stock sale.

The question comes down to how long in advance of a stock sale (or asset sale) can you terminate a safe harbor 401(k) Plan and still rely on the safe harbor rules? A day, a week, a month? Any thoughts on this would be appreciated.

[ETA Consulting LLC]

You cannot rely on a safe harbor feature for any plan that terminates during the year. If it is a stock sale, why not terminate the plan effective December 31st and continue to operate the plan under the current provisions? 410(b)(6) allows you to do that with no problems. Now, if it were an asset sale, then I could see an immediate plan termination being in order; you still would not be able to rely on the safe harbor for the year.

Good Luck!

[Kevin C]

You cannot rely on a safe harbor feature for any plan that terminates during the year.

Actually, the 401(k)/401(m) regulations have sections that list the requirements for a terminating plan to stay safe harbor for the final short year. If you qualify under (ii) you can still be safe harbor.

1.401(k)-3(e)(4)Final plan year.—

A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either—

(i) The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor matching contributions, other than the requirement that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections; or

(ii) The plan termination is in connection with a transaction described in section 410(b)(6)© or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(d).

The same rule is in 1.401(m)-3(f)(4).

I don't see anything that defines what is considered to be "in connection with a transaction described in section 410(b)(6)©". Was terminating the 401(k) required by the purchaser as part of the sale?

In your case, with the last minute change in the sale date, I think you have a very strong argument that the termination is "in connection with a transaction described in section 410(b)(6)©" even if the termination is a month before the actual sale date.

[ETA Consulting LLC]

I stand corrected.

[Sully]

Was terminating the 401(k) required by the purchaser as part of the sale?

Yes, the plan termination was required as part of the sale.

A further concern was that if they leave the termination date at June 30th and the July 31st sale date gets postponed again, and again.....

[Kevin C]

Yes, the plan termination was required as part of the sale.

I think that is very strong evidence that the termination is "in connection with a transaction described in section 410(b)(6)©".

A further concern was that if they leave the termination date at June 30th and the July 31st sale date gets postponed again, and again.....

That's a very good reason to delay the termination date until closer to the sale date. How long do they want their employees to not be covered by a plan? What happen if the sale gets put on hold? What happens if the deal doesn't go through?

The last time we went through the sale of a client, they reached a tentative agreement and were within 2 weeks of the sale date when things imploded. Negotiations re-opened a few months later and they finally closed the deal almost a year later than originally planned. Fortunately, they wanted to terminate the existing plan immediately before the sale, so we delayed the termination until the deal was finalized.