Participating Employer Setting up Own Plan

[chris]

Participating employer ceased participation in safe harbor 401(k) earlier this year and wants to set up own 401(k) Plan mirroring all aspects of the prior plan. Would 401(k) Plan set up by now non-participating employer into which non-participating employer's employee/participants' assets will be transferred be considered a new plan or an amendment and restatement of the original 401(k) plan? Which way would be better --- consider it an amendment and restatement of the prior plan for purposes of the non-participating employer or consider it a new plan? Would seem practically speaking to be better to treat as amendment and restatement of the former participating employer's "portion" of the prior plan. Thanks for any guidance.

[Lou S.]

How, when, and why did the participating employer cease participating in the plan?

[QDROphile]

Were it not for what I infer is a gap in contributions, the best approach would be to spin off the portion of the plan that related to the nonparticipating employer to form the "new" plan, automaticaly retaining "all aspects of the prior plan." It still might be the best approach. I am troubled by the gap in contributions under any approach. It might be better not to resume anything until January 1, and then the spin off should be a serious consideration, but I have not thought through the repurcussions of ceasing contributions mid-year.

[chris]

As I understand it, majority shareholder in this entity owned a majority position in a number of similar entities. To try to simplify filings, each of those entities signed off to be participating employers on one entity's 401(k) plan. Majority shareholder in this specific entity sold all shares to minority shareholder earlier this year and now the sole shareholder is looking to have the entity set up and maintain its own 401(k) plan separate and apart from the others. To my knowledge all deferrals still in place and all contributions being remitted on a timely basis so technically the entity is still being treated as part of the group. Given that backdrop how would entity's plan going forward be considered? Assuming entity signs off on a document today mirroring all provisions of prior plan, when should the plan be deemed effective? Jan. 1 of 2014 so as to allow for all deferrals up through year end and going forward? Or have entity sit tight and stay in the group and have new arrangement effective Jan 1, 2015?

[Kevin C]

What a mess.

If it is a new 401(k) plan, it would be a successor plan and not eligible to have a short initial safe harbor plan year under 1.401(k)-3(e)(2). The definition of successor plan referenced by the regs is in 1.401(k)-2( c)(2)(iii).

If you treat the "new" plan as a restatement and amendment of the prior plan, you have disqualified the plan because you fail to satisfy the plan year requirement in 1.401(k)-3(e)(1) since the SH provisions were not in effect for the entire 12 month plan year. I'm not sure if that could be corrected under EPCRS. Even if you ignore the suspension of the SH contribution, the participants were not allowed to defer for part of the plan year, so correction could get expensive.

Hopefully, they followed the requirements to suspend or reduce the SH contribution from 1.401(k)-3(f) (including the proposed regs) or they disqualified the prior plan.

My response was based on the original post stating the employer ceased participation in the prior plan. Are you saying now that they are still participating in that plan?

[chris]

Agreed as to the messiness.....

I apologize for not having my facts straight. I do believe they/their employees are still actually participating in the prior plan. In light of the "successor plan" issue, then looks like the better approach may be for them to hang in the group plan through 12/31/14 and have a "new" plan to be effective Jan 1, 2015. Thus, have participation in the prior plan formally cease as of 12/31/14.... Thanks for helping me try to think through the mess....

[Lou S.]

Agreed as to the messiness.....

I apologize for not having my facts straight. I do believe they/their employees are still actually participating in the prior plan. In light of the "successor plan" issue, then looks like the better approach may be for them to hang in the group plan through 12/31/14 and have a "new" plan to be effective Jan 1, 2015. Thus, have participation in the prior plan formally cease as of 12/31/14.... Thanks for helping me try to think through the mess....

If you can qualify for the 410(b)(6)© transition relief, then I think was you are proposing is probably the best and simplest solution.

[chris]

Were it not for what I infer is a gap in contributions, the best approach would be to spin off the portion of the plan that related to the nonparticipating employer to form the "new" plan, automaticaly retaining "all aspects of the prior plan." It still might be the best approach. I am troubled by the gap in contributions under any approach. It might be better not to resume anything until January 1, and then the spin off should be a serious consideration, but I have not thought through the repurcussions of ceasing contributions mid-year.

QDROphile: I don't believe there has been a gap in contributions as I believe the participants are still deferring/participating in the "group" plan. If the portion of the plan that relates to the (to-be) non-participating employer is spun off at whatever point in time, how do you deal with the details of the underlying document, e.g., effective date, new plan vs. amendment/restatement, etc., where the (to-be) non-participating employer wants its own document in place? Thanks for your help.

[QDROphile]

You create a document that that describes and effects the spin off and then the employer who is the sponsor of the spun-off plan adopts a restatement of the same pre-spin plan document for the spun-off plan. The original effective date of the spun-off plan is still the original effective date of the pre-spin plan (or consider the original effective date of the spun-off plan as the date the renegade employer adopted the pre-spin plan). The effective date of the restatement is the effective date of the spin off. Don't forget to attend to the related trust issues, including transfer of assets if there will be a spun-off trust. This assumes that the spun-off plan is going to be exacly the same as it was before the spin off, at least for a while.

[chris]

You create a document that that describes and effects the spin off and then the employer who is the sponsor of the spun-off plan adopts a restatement of the same pre-spin plan document for the spun-off plan. The original effective date of the spun-off plan is still the original effective date of the pre-spin plan (or consider the original effective date of the spun-off plan as the date the renegade employer adopted the pre-spin plan). The effective date of the restatement is the effective date of the spin off. Don't forget to attend to the related trust issues, including transfer of assets if there will be a spun-off trust. This assumes that the spun-off plan is going to be exacly the same as it was before the spin off, at least for a while.

In light of issues raised in prior posts above probably best to have this spin-off occur as of December 31, 2014 and have participating employer cease participation as of December 31, 2014? Thus, spun-off plan comes to life as of Jan 1, 2015? Or do you think the spin-off can take place at whatever point in time prior to December 31..? Thanks for your help.

[QDROphile]

The plan document question is not that interesting an issue compared to what to do about the change in control that may have occurred in the middle of the year. Once you have that figured out, then turn to the plan configuration and documentation. Of course it is easier if you can avoid mid-year changes; you may not have that luxury.