Plan Termination Due to Merger of 2 Companies into Another New Company

[Anagoge]

Consider 2 small LLC employers. They both have common ownership, but the majority owners are retiring due to emergency on Dec 31, and a younger minority owner is starting a new LLC that will take over both companies on Jan 1. The previous 2 LLCs/companies will no longer exist on Jan 1. Both original companies have safe harbor 401(k) plans in place. No participant notices have been sent yet and the plan year ends on Dec 31. Can they terminate both 401(k) plans on Dec 31 this year, finalize 2014 testing and SH matching, and then give the employees the ability to roll into the new plan once it is up and operational around March 1? Assume the new 401(k) will also be a safe harbor plan. Any gotchas when doing this? Any better solutions?

I realize the timing here is bad, but I I can't control that, due to the emergency situation with the owners and the fact that the termination of the companies is already in motion.

[Bird]

If the companies won't exist then there is no payroll, so whatever you do with the old plans can be done when you/they get to it. I think it would be cleanest if they were term'd on Dec 31.

[QDROphile]

Are you saying that there will be no operations or pay to employees from Jan 1 until approximately March 1? Did you intend to use the term "merger" correctly?

[Anagoge]

The employees will continue working and getting paid Jan - Feb, but they are aware that they can't get a new 401(k) running by Jan 1 of 2015, so they are shooting for a new plan up on or before March 1. I agree this isn't a formal merger of the plans, but more likely a dual termination and transfer of accounts into the new plan around March 1. The LLCs might be classified as a formal merger (I don't know the exact business details), but the plan is probably not classified as a merger.

Anything special they need to do to be in compliance Safe Harbor wise? They have not sent any notices out, due to the emergency situation. I assume you let employees know as soon as possible. I'm also curious if since there is common minority and the majority ownership in old and new LLCs that the DOL might classify the new/old LLCs as being the "same company" which I believe would disallow distributions, and require everyone to roll over to the new plan. I think the participants would be OK with that, though.

[Bird]

There is a possibility that the companies are part of a controlled group, but since you said a minority owner was becoming the sole owner I figured that was not an issue.

You could in fact merge the two old plans into the new one. Both sides have to agree on that and document it. Some folks seem to think it is never a good idea to merge because any problems from the old plans are transferred to the new plan, but as long as there are no other issues I think it would be appropriate here, and perhaps safer just in case there are controlled group problems that would make a termination problematic.

Sorry but I have to say it kinda bugs me when I hear things like "I agree this isn't a formal merger of the plans, but more likely a dual termination and transfer of accounts into the new plan around March 1. The LLCs might be classified as a formal merger (I don't know the exact business details), but the plan is probably not classified as a merger." It is or it isn't. Somebody either knows or has to decide all this. If you are not in charge of plan admin then who is?

[rcline46]

Is it possible that the 'new' LLC could be consider a successor employer? If so, then here CANNOT be a termination of the current plans and starting of a new DC plan as proposed.

[Anagoge]

Bird - I am not the administrator of the plan or an owner or employee, I am only an advisor to the plan. Note that this an emergency sale situation and many of the details are not finalized yet, since the draft contract is just being written up. It was decided last night that the transaction will be done via a stock sale, though.