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Merging of assets except loans


Lori H

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I am assuming this question is related to your other questions about loans and plan mergers.

Not sure if this helps or not but if the new company simply doesn't want to offer new loans I believe you can amend their plan to allow the existing loans into the plan and nothing else about loans changes. So it can be drafted such that no new loans are offered, you can't refinance the merged loans and so forth. The existing group of loans are simply grandfathered into the new plan. Once this set of loans is gone there are no more loans.

Would that make the new company more open to allowing this set of loans into the new plan?

I am just trying to figure out why so much resistance to allowing this group of loans into the new company's plan I guess.

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The new plan has a loan provision, they just don't want to transfer over the loans. Not sure why, but this has been the case when other plan sponsors have moved assets to their plan. they allowed everything but the loans and their plan was amended to allow personal payments, the term coupon was mentioned. How would that work with the sponsors plan that is being merged? Do they keep filing 5500's until the loans are paid back just showing a loan balance as the only plan asset progressively getting smaller until the last loan is paid back which has a maturity date in 2020.

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You are describing a plan that is maintained solely for the purpose of holding the loans that originated under the plan. The plan is frozen and the trust is a wasting trust, meaning that distributions or transfers occur, there are but no contributions. The plan must observe all requirements, such as maintaining a complain document, filing Form 5500, providing notices and statements. I am curious about how this administrative expense and annoyance is justified. I understand aversion to plan mergers, but the merger was not avoided.

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You are describing a plan that is maintained solely for the purpose of holding the loans that originated under the plan. The plan is frozen and the trust is a wasting trust, meaning that distributions or transfers occur, there are but no contributions. The plan must observe all requirements, such as maintaining a complain document, filing Form 5500, providing notices and statements. I am curious about how this administrative expense and annoyance is justified. I understand aversion to plan mergers, but the merger was not avoided.

Me too. I am curious as well.

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Trick question, huh? :)

First of all, it is sections "7".12.1."x" not "17".12.1."x" (where x is 9 or 10 or 11), right?

Second, gotta read 7.12.1.7 where it is made clear that the substantial and recurring requirement still applies.

If you twist my arm I will back down from "There is no such thing as a frozen PS/401(k) plan." To:

"There is only a small window between the time when a profit sharing plan is frozen until it is terminated where it can satisfy the rules requiring substantial and recurring contributions."

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You are correct about the numbering. It is 7.12.1.x with x=9, 10, and 11.

I think this comes out as a failure to have recurring contributions effectively causes a partial termination, with the most significant consequence being vesting for all at the point of the partial termination, whenever that is. It would certainly be if the plan were amended to provide for no more contributions. The plan could be maintained with a wasting trust, but the plan would be disqualified if the sponsor failed to maintain the document in compliance with formal requirements (e.g. amending to reflect changes in law) or applicable operational compliance. There would be few operational requirements other than to follow plan terms, including required distributions. The cessation of contributions, by itself, would not cause disqualification, and the freeze could be forever, subject to the required distribution rules.

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I think the IRS disagrees with you. Yes, the substantial and recurring contribution requirement most frequently is related to the occurrence and consequences of a complete discontinuance defined in 1.411(d)-2(d) (specifically 2(d)(ii) mentions the substantial and recurring contribution requirement). As you point out, the consequence of a complete discontinuance is full vesting, not disqualification.

But the IRS takes the position that making substantial and recurring contributions to a PS plan is also a qualification issue.

Here is a cite to a very recent case where the IRS disqualifies the plan for, among other reasons, "(2) petitioner failed to make recurring and substantial employer contributions;". Now, I admit that the case is, in legal parlance, full of "bad facts" and I would feel better if the judge had included in his analysis confirmation of the IRS' second reason for disqualification, but it is what it is. The point here is that the IRS itself raised the issue as one which justified disqualification.

http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=10607

I point out that 1.401-1(b)(2), which says in relevant part: "To be a profit-sharing plan, there must be recurring and substantial contributions out of profits for the employees.", is still in effect, although admittedly old due to the fact that it was last amended in 1963.

Finally, why did we set up all those 0% Money Purchase plans if not to avoid the requirement for substantial and recurring contributions? Was the entire industry running, tails tucked 'tween its collective legs, from a non-existent boogie-man?

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I would be persuaded if 7.12.1.10 said it applied only to pension plans or did not apply to profit sharing plans. But expecting the IRS to draft well, especially in documents that may not be relied upon, is too much. I also am not impressed with any court decision in which the IRS tossed in the kitchen sink unless the decision reaches a specific ruling on the particular point and the court did not validate the IRS contention about the recurring contributions at all despite hitting on other reasons. I did not participate in setting up any 0% MPP plans. Maybe I just did not get the joke. I don't feel like any research on the subject. I will keep your concerns in mind the next time the issue is relevant.

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Yes, I already noted that the decision itself doesn't validate this specific IRS position and that its usefulness is limited to confirming what the IRS feels is a reason for disqualification.

My job is to steer my clients away from those things the IRS thinks might be a reason for disqualification; especially if there are alternatives to maintaining a profit sharing plan without substantial and recurring employer contributions and if said alternatives are as cheap as converting the plan into a 0% MP plan.

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  • 2 weeks later...

i recognize that a 401(k) must be considered a source of ongoing contributions so this plan could not technically be frozen, but how could the plan be amended to allow for loans to be repaid following termination using a "coupon" or other personal form of payment? Based on feedback from the parent company, it appears that accepting or merging loans into the new plan is not uncomplicated, they just don't believe they will be ready to do it within the next 12 months.

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  • 6 months later...

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