For a merger of 401(k) plans, do you like December 31 or January 1

[Peter Gulia]

A big business will acquire a smaller business (this summer or autumn). Big intends to merge Smaller's safe-harbor 401(k) plan into Big's (non-safe-harbor) 401(k) plan.

(Assume both businesses have a calendar year for accounting and tax. Assume both plans have a calendar plan year.)

If the merger of plans happens before December 31, 2014, would that defeat the Smaller plan's safe-harbor treatment?

If to avoid such a concern (or for other reasons) one suggests that the merger of retirement plans wait for year-turn, does it matter whether the merger is effective as of December 31, 2014 or January 1, 2015?

Which of those do you like better? What are your reasons for why you prefer it?

[Bird]

Generally prefer Dec 31 so you don't have to file a short plan year return for Jan 1. I don't remember for sure but I think we've taken the position that a merger on Dec 31 does not impact safe harbor either way for either plan for that year, but if you want to be super-cautious, then Jan 1 is best.

[Kevin C]

Dec 31. Mainly for the reason mentioned to avoid an additional Form 5500 for a 1 day plan year. With a merger as of the end of the day on Dec 31, that still gives a full 12 month (1/1 -12/31) plan year for the smaller plan, so I don't see it jeopardizing safe harbor status.

[Peter Gulia]

Bird and Kevin C, thank you for your good help.

In this situation, doing two annual reports might be unimportant because Smaller's plan has much fewer than 100 participants and does not need an independent qualified public accountant's report. The recordkeeper (for both plans) does not have a separate fee for Form 5500 preparation.

Does that change your analysis about whether December 31 or January 1 is preferable?

[Kevin C]

I would still merge on December 31.

[david rigby]

Peter, you might run this question by the (big plan) auditor. I did it once (although safe-harbor was not an issue) with the following result:

- use 12/31,

- old plan shows zero participants and zero $ at EOY,

- surviving plan includes both merged participant count and $ at EOY,

- happy auditor.

[Peter Gulia]

Kevin C, thank you for the follow-up.

David Rigby, thank you for the idea about talking with the auditor.

Before putting this query on BenefitsLink, I had checked with the audit firm's engagement partner and eb quality-control chief. They said either effective time works for them.

Likewise, I've had clients go in different directions on this point - even after considering the difficulty of a plan year that begins and ends in one day.

[anspai]

Similar circumstances above but the acquiring company doesn't want to wait until year end to merge.

Facts:

Unrelated Company A acquires Companies B & C (also both unrelated to A and unrelated to each other).

All run calendar year plans. A wants to merge both into A as of 5/1/15.

A is a traditional 401k plan

B is a traditional 401k plan

C is a safe harbor match plan

Does B test it's plan from 1/1 - 3/31?

Does A include B's participant contributions from 4/1 to 12/31 or full year?

Does C lose the safe harbor test exemption for contributions made from 1/1 - 3/31

Does A include C's participant contributions from 4/1 to 12/31 or full year?

Also if A's plan allows for predecessor service with B & C for eligibility and vesting, how does A treat B and C's HCE's in the first year (2015) they are in A's plan?

Lastly, Assume the following:

B's plan had a 3 month wait and A's had a 12 month wait.

A's plan allows for predecessor service with B for elig and vesting

Sam is a participant in B's plan with 8 months of service.

With these assumptions, even with predecessor service Sam has not met the waiting period for A's plan. But because Sam was already eligible for B, does he become eligible for A's plan immediately or can A require him to meet the waiting period for A's plan before Sam can enroll?