Leaving an Open MEP

[Jennifer D.]

We have a client who was part of a franchise and owned 3 companies in that franchise. First, the client sold one of the companies. As they were still a franchise, this plan became a closed MEP. Now, the client and the other owner have left the franchise which means we have an Open MEP. The problem is the client who owns 2 out of the 3 companies, does not wish to sponsor and Open MEP and is kicking the other owner out of the plan. This is effective 5/1/12. The client didn't tell us until now, so the company being kicked out of the plan is still deferring (only the owner makes deferrals). We have spoken with him, and he does not want to create a spin-off plan. We need to go back to him wit instructions on what his options are, but everything we have looked at only talks about ceating a spin-off, creating a MEP, etc. Nothing talks about when the client DOESN'T want to do any of those things.

My thought is that he needs to have his deferrals refunded to him as of 5/1/12, sign a resolution ceasing participation in the plan, and that's it. Does anyone have an opinion and/or a source for that opinion I could use with this client? He isn't going to be happy when we tell him he has to get all of his money back.

[MoJo]

We have a client who was part of a franchise and owned 3 companies in that franchise. First, the client sold one of the companies. As they were still a franchise, this plan became a closed MEP. Now, the client and the other owner have left the franchise which means we have an Open MEP. The problem is the client who owns 2 out of the 3 companies, does not wish to sponsor and Open MEP and is kicking the other owner out of the plan. This is effective 5/1/12. The client didn't tell us until now, so the company being kicked out of the plan is still deferring (only the owner makes deferrals). We have spoken with him, and he does not want to create a spin-off plan. We need to go back to him wit instructions on what his options are, but everything we have looked at only talks about ceating a spin-off, creating a MEP, etc. Nothing talks about when the client DOESN'T want to do any of those things.

My thought is that he needs to have his deferrals refunded to him as of 5/1/12, sign a resolution ceasing participation in the plan, and that's it. Does anyone have an opinion and/or a source for that opinion I could use with this client? He isn't going to be happy when we tell him he has to get all of his money back.

Well, whether he wants to or not, as I read the DOL's pronouncement on the subject, an "Open MEP" is really a bunch of SEPARATE plans using a common document, so, according to the DOL, he already is sponsoring a separate plan. That being the case, what justification would exist for any kind of "refund" of otherwise valid deferrals/contributions into the plan?

[Jennifer D.]

Our thought was that because the sponsor wants this other owner out, the other owner is technically deferring into a plan he no longer qualifies to be in - that would be the reason for the refund back to 5/1/12 - the date the franchises stopped.

I see what you are saying about the Open MEP. That sort of thinking would lead me to believe that everytime you have a situation where ownership has changed and you have 2 now unrelated employers in a plan you have an Open MEP. But there has to be a way of stopping that participation in the Open MEP if they don't want to create a spin-off plan, right?

[MoJo]

Our thought was that because the sponsor wants this other owner out, the other owner is technically deferring into a plan he no longer qualifies to be in - that would be the reason for the refund back to 5/1/12 - the date the franchises stopped.

I see what you are saying about the Open MEP. That sort of thinking would lead me to believe that everytime you have a situation where ownership has changed and you have 2 now unrelated employers in a plan you have an Open MEP. But there has to be a way of stopping that participation in the Open MEP if they don't want to create a spin-off plan, right?

If they don't want an "open MEP" then 1) take that into consideration BEFORE the change in ownership occurs (due dilligence on benefit plans? - Yea, I know I'm smoking something), and 2) TERMINATE the "plan" (the separate plan sponsored by the company that is being "expelled" from the MEP AT THE TIME of hte change in ownership. Otherwise, you have an ongoing plan, and it must be compliant.

[Jennifer D.]

If they don't want an "open MEP" then 1) take that into consideration BEFORE the change in ownership occurs (due dilligence on benefit plans? - Yea, I know I'm smoking something), and 2) TERMINATE the "plan" (the separate plan sponsored by the company that is being "expelled" from the MEP AT THE TIME of hte change in ownership. Otherwise, you have an ongoing plan, and it must be compliant.

I wish my clients would smoke what you're smoking. If we "terminate" the plan of the person getting kicked out, then we would still need to refund any deferrals made past the date of termination which would be 5/1/12, correct?

[MoJo]

I wish my clients would smoke what you're smoking. If we "terminate" the plan of the person getting kicked out, then we would still need to refund any deferrals made past the date of termination which would be 5/1/12, correct?

No, I don't think so. You can't "retroactively" terminate a plan. Terminate it as of today or a date in the future, and then distribute the assets as appropriate, including the deferrals made post 5/1/2012. File a final form 5500 as of the date of the termination. I see no way to get the money out of the plan, save for a "distributeable event" - which would include plan termination.

As far as I'm concerned, what the "other owner" wanted as of 5/1/2012 is totally irrelevant. What you have "today" are "two separate plans" sharing a common document.

Yea, I've been trying to get others to smoke some stuff too, for my entire career - and consider myself fortunate when I get called in at the 11th hour. At least it's better than the 13th hour....

[austin3515]

Was there a break in service for the people being kicked out? If not, then terminating the plan precludes a new 401k plan for at least 12 months. In fact, can you even create a distributable event by terminating only a portion of the plan? I actually dont think so.

Also, clearly any of these changes could only be done prospectively. There is not basis for invalidating deferrals retroactively.

Also, as an adopting employer (who also might be a trustee) the other owner might have his/her own rights to do a spin-off. If they're getting into a fihgt, I think you need an ERISA attorney to figure out who can do what. I'm not sure who calls the shots in your scenario, but I think that is an important question to have the answer to.

[MoJo]

Was there a break in service for the people being kicked out? If not, then terminating the plan precludes a new 401k plan for at least 12 months. In fact, can you even create a distributable event by terminating only a portion of the plan? I actually dont think so.

I agree with everything you say except the above. This wouldn't be "terminating only part of a plan." It would be terminating the whole of the plan sponsored by the entity "being kicked out of the open MEP arrangement." And this is where it gets interesting (to people with sick minds like mine). The DOL says it is two plans sharing a common document. The IRS doesn't necessarily see this as being that way. But, to the extent that the "employer" terminates "their plan" (and the IRS agrees it is a separate plan for qualification rules), then there are successor plan issues (which I don't think are avoidable in any event), but there is a distributeable event. *IF* the employer truly does not want a stand alone plan, I think the most prudent course of action is to "spin off and terminate" all at once. Then there is no doubt that the plan being terminated is a separate plan. I've done that in a one amendment package. Then don't start another 401(k) plan for the requisite time to forestall the successor plan issues.

[austin3515]

OK then that makes point three all the more valid - each employer should have discretion here.

I'm a little iffy on how all of a sudden a single plan is split into multiple plans as the result of a corporate transaction. I'd like to see some formal guidance on this. It might be treated as separate plans, but IS IT REALLY separate plans? Beats me. This is all very new so I suspect it might be among the things not yet settled...

[MoJo]

I'm a little iffy on how all of a sudden a single plan is split into multiple plans as the result of a corporate transaction. I'd like to see some formal guidance on this. It might be treated as separate plans, but IS IT REALLY separate plans? Beats me. This is all very new so I suspect it might be among the things not yet settled...

How about DOL Advisory Opinion 2012-04a. The bottom line is (from the DOL's perspective) OPEN MEPs NEVER WERE "single plans" - they ALWAYS WERE separate plans, with separate fiduciaries, with separate Form 5500s - and to the extent they didn't do it right, someone (everyone, actually) is a "delinquent filer." Rumor has it the DOL will be issuing further guidance on the issue, possibly providing a "safe harbor" corrective measure that will allow employers to file only the past two years worth Forms 5500 to correct - but that means separating out the data for testing purposes, etc.

The corporate transaction that destroys an appropriate MEP (where some relationship justifies the common plan) acts to separate teh plans (from the DOLs perspective) EVEN THOUGH only one document exists, and one recordkeeping platform exists, and possibly the assets are commingled (although, that itself raises interesting fiduciary concerns - which the DOL has expressed anxiety over).

[Peanut Butter Man]

The plan document should contain provisions on ending the relationship with one of the additional adopting employers. I would follow the procedures in the plan document for terminating adoption by one of the adopting employers.

I'm firmly with the people who say that you cannot retroactively terminate a 401(k) plan.