Acquisition of Subsidiary, Merging Safe Harbor Plans

[LANDO]

I'm sure the answer is out here somewhere, but I'm in sort of a hurry.

Sponsor acquired another organization in a 410(b)(6)© transaction. The acquired company has a Safe Harbor Plan (QACA), and the sponsor has a regular safe harbor match plan.

Is there anyway these plans can be merged mid-year? My initial reaction is "NO" because of the mid-year amendment rules around safe harbor plans, but the sponsor pushing to merge to save administrative expenses. Obviously, they'd get the benefit of the 410 transition rules for coverage purposes.

Any wiggle room here?

[austin3515]

http://www.fringefunding.com/img/~www.fringefunding.com/hrnewsletter.generic.11.05.12.pdf

This McCay Hochman article says you could have terminated one of the plans, but if the deal has closed it is too late to terminate.,
https://www.mhco.com/BreakingNews/SH_12Month_102413.html

One idea might be to change the Plan Year ends to say 3/31, have a short plan year, then merge effective 4/1. I "think" the only requirement for this is that the plan be a safe harbor for the next 12 months. Yes, I think this will work. Here is the reg on changing plan years. Note that QACA's are covered by this same reg and that the reg does not specific you must use the same contribution formula.,
1.401(k)-3(e)(3):
(3) Change of plan year. A plan that has a short plan year as a result of changing its plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the plan year has less than 12 months, provided that—

(i) The plan satisfied the requirements of this section for the immediately preceding plan year; and

(ii) The plan satisfies the requirements of this section (determined without regard to paragraph (g) of this section) for the immediately following plan year (or for the immediately following 12 months if the immediately following plan year is less than 12 months).

[LANDO]

That is a sweet idea Austin. Thanks. At least that gives me an alternative to share with them.

[LANDO]

Just a follow up question...couldn't an amendment to create a short plan year be considered a prohibited mid-year amendment.

[austin3515]

It could be, except that the regulations specifically permit it. Therefore this type of amendment would be totally uncontroversial.

[LANDO]

I'm a little iffy on that part. Just because the amendment is allowed under the regulations, I'm not sure that means it could be made as a mid-year amendment to a safe harbor plan? Seems like that's a pretty dramatic change to the nature of the safe harbor, as in, it could impact someone's ability to take advantage of the matching safe harbor for the short plan year. Like, sponsor gives only 30 days notice that they are going to run this short plan year. Hmmmm...I like the answer tho, and may have to roll with it.

Thanks for your insights.

[austin3515]

for the immediately following plan year (or for the immediately following 12 months if the immediately following plan year is less than 12 months

Based on your reading, the following plan year would ALWAYS be a short plan year. Why would the possibility of a short plan year only be noted parenthetically if it was the mandatory outcome?

I don;t disagree with you, and in the right situation (i.e., a big plan) I would probably get an ERISA attorney to bless it.

But the regs in my opinion clearly do not prohibit it. They had their chance to tie our hands when they wrote the regulation. They left the door open. Whether intentional or not, it is open. They wrote down in plain in English what was required, and no requirement to maintain the same formula was mentioned.

[LANDO]

Now that I'm reading 3(e)(3)(ii) I'm more confused. Is that saying you can have back to back short plan years as long and the requirements of 1.401(k)-3 are met for each 12 month period following a short plan year, or are you saying the parenthetical is referring to amending for a short plan year prior to the short plan year?

[austin3515]

It sounds like there are two possibilities. Changing a calendar year plan to a 6/30 plan during the calendar year. In that scenario, 1/1 to 6/30 is the short plan year, and 7/1 to 6/30 is the next plan year. The other option is to amend the Plan year before the beginning of the plan year to a 6/30 year end. That way, the upcoming plan year is less than 12 months. In that scenario, the Plan would need to be safe harbor not just for the next 6 months, but the next 12 months.

[LANDO]

Ahhhh...you have the patients of Job Austin! That certainly seems like a reasonable interpretation, and I see now how you conclude the regs support mid-year amendments of safe-harbor plan to create short plan years.

Rarely can I get sponsors to engage legal counsel even for larger plans. Generally we end up providing our opinion with the caveat that they should engage legal/ERISA counsel on these less than crystal clear issues.

Thanks again.