Safe Harbor plan abruptly terminated

[K2retire]

I just returned from vacation to discover that a plan for which I am the TPA and document provider persuaded an attorney to draft a plan termination resolution effective upon signing (last week). No advance notice was provided to the employees. The termination was required by the company purchasing the stock of the plan sponsor, who failed to act do anything until the day before the closing.

What are the possible repercussions of failing to provide appropriate notice of terminating the safe harbor contribution? I don't know if the employees are still being paid by the plan sponsor, or are now being paid by the new company.

The plan calls for a 3% non-elective safe harbor contribution based on full year compensation (even for mid year entrants). The recordkeeper was directed not to accept any additional contributions as of last week, although additional contributions will be required for any 2016 new entrants. Our relationship with the recordkeeper is such that I expect to be able to fix this.

Since the deal has apparently already gone through, what happens if the new owner refuses to fund the required contributions?

[David Schultz]

This is addressed in Treas. Reg §1.401(k)-3(e)(4)(ii). Since the plan is terminating due to a merger, it does not have to provide the employees with the Supplemental Notice. However, the plan sponsor is required to fund the accrued benefits through the date of termination, and the plan must satisfy ADP/ACP and top-heavy testing for the year.

Did the liability for funding the accrued benefits remain with the seller under the purchase agreement? In any event, the legally responsible party must fund the accrued benefits. Failure to do so could disqualify the plan, and bring legal action by participants and the DOL to recover the liabilities.

[K2retire]

I'm guessing the reason the buyer insisted that the plan termination occur before closing was in hopes of avoiding any responsibility for accrued benefits.

They won't be top heavy and don't match, but I suspect they'll fail ADP.

[Kevin C]

A SH plan termination in connection with a 410(b)(6)© transaction is one of the exceptions allowed a final short SH plan year. See §1.401(k)-3(e)(4)(ii) cited above. If you don't meet that exception, you are under (i), which requires 30 day advanced notice and ADP/ACP testing, i.e not SH.