Leaving PEO Plan When CO is Acquired

[401 Chaos]

Have looked on the M&A forum but did not find much on PEOs there.  Know there has been a good bit of discussion on exiting PEOs in this forum in the past but haven't seen much recent or much addressing situation involving departure from a PEO plan due to corporate acquisition and am wondering what others are seeing as the most typical scenario of dealing with departures from a PEO.

Situation is this.  Small company grew to mid-size company.  Has used one of the leading national PEO groups for many years for payroll, welfare benefits and as participant in the PEO's 401(k) Plan.  Company is being acquired in a stock deal by large conglomerate with its own 401(k) plan.  Company will become a wholly owned subsidiary of conglomerate and participating employer in the conglomerate's 401(k) plan (and other benefit plans) so is terminating its contract with PEO and seeking to leave 401(k) Plan.  Employees will continue on doing same jobs with company as before but will just become part of the conglomerate's controlled group and will sever co-employment or whatever relationship they had with PEO.

PEO group has been inconsistent in advising on the options for addressing participants' accounts in the PEO 401(k) Plan.  At first said they would need to basically spin off or do plan to plan transfer to conglomerate's 401(k) plan.  Now are saying they can make distributions to participants and participants can roll over.  Conglomerate would generally prefer the later but mainly wants to do what is right with respect to potential distributable event and successor plan rules, etc.  We are still waiting to see plan provisions for PEO plan on the distribution terms there, etc.

I am curious though why the internal confusion at the PEO and also curious what others are seeing done in these situations which seem to be increasing with proliferation of PEOs.  I understand lack of regulatory guidance here makes some of this difficult but given the number of companies using PEOs these days it seems these are issues that should have pretty basic industry-standard options / approaches even if there is some gray area there.  PEO though seems to be looking to conglomerate for advice on how to handle which seems very backwards to me.

Appreciate any thoughts or insight from recent experience.

[Kevin C]

If the stock sale hasn't happened yet, they still have options. If the mid-size company terminates their portion of the PEO's multiple employer plan before the sale and mid-size company doesn't have an alternative defined contribution plan, the termination will be a distributable event.  See 1.401(k)-1(d)(4)(i).  They would also have the option of spinning off their portion of the plan and merging it into the acquiring company's plan.

 

If they wait until after the sale to take action, they will not be able to allow distributions to those still employed by the acquiring employer because the acquiring company's 401(k) will be an alternative defined contribution plan. That basically forces them to merge the plans.

[ETA Consulting LLC]

17 hours ago, Kevin C said:

If they wait until after the sale to take action, they will not be able to allow distributions to those still employed by the acquiring employer because the acquiring company's 401(k) will be an alternative defined contribution plan. That basically forces them to merge the plans.

I agree.  One more thing to consider. There is a 12 month window with respect to determining whether an alternative Defined Contribution plan exists.  So, it's not an issue of merely doing everything before the sale.  In practice, it would have to be terminated and fully distributed at least 12 months before the sale.

Good Luck!

[401 Chaos]

Thanks very much for the replies.  This is very helpful and seems consistent with what I've generally understood--i.e., that in most of these cases the target's portion of the PEO plan needs to be spun off and merged.  I'm confused about why the PEO seems to be suggesting that they permit distributions here.

A couple of questions:

1.  ETA, your note regarding the 12-month period seems to suggest this operates differently from how we would anticipate in a non-PEO merger situation.  For example, if we had regular, non-PEO target company that took action to terminate its 401(k) plan immediately prior to closing, we would anticipate the target having the ability to make distributions to participants and participants being able to roll over their distributions into Buyer's plan and target participating in Buyer's plan after the transaction since it is part of Buyer post-closing.  Does this work differently when there is a spinoff and immediate termination of the spun-off target plan prior to closing because of the PEO involvement?

2.  If there is this 12-month requirement in the PEO situation, seems like it is probably very rare that there would ever be distributions from the target's portion of a PEO plan?

3.  I'm assuming the PEOs are generally of very little or no help with the spin-off and termination process in most cases?  

Thanks

[hr for me]

Problem in #3 is often the PEO is not involved in the business strategy/M&A talks, assets vs stock sales and only hears later some of the details from the employer that are decided at a very high level.  Sometimes internal HR would be included, but not always.  Generally they are also hesitant to give advice for a time period where they are no longer the employer.  But each PEO is different  and some would possibly have more knowledge than others, depending on whether they had been through this scenario before.     But if term'd prior to the closing, I would expect the PEO to help handle that part but with possibly an appropriate increased fee to do so.  But there is nothing that I know of that requires the termination rather than plan-to-plan transfer.  And honestly I suspect they deal a whole lot more with plan-to-plan transfers.

[Kevin C]

On 8/5/2017 at 9:29 AM, ETA Consulting LLC said:

 So, it's not an issue of merely doing everything before the sale.  In practice, it would have to be terminated and fully distributed at least 12 months before the sale.

Can you elaborate on this comment? 

[ETA Consulting LLC]

17 hours ago, Kevin C said:

Can you elaborate on this comment? 

I was merely pointing out that an alternative defined contribution plan is a plan that exists any time during the date of plan termination and 12 months following the distribution of plan assets. Hence, merely terminating a plan before the sale doesn't prevent it from becoming an alternative DC plan.

I did not consider there being a 'severance of employment' where one company purchases another but does not agree to have any involvement in their plan.  Was that what you were getting at?

[Kevin C]

I'm still not following why you say the current plan would have to be terminated at least 12 months before the sale.  The "employer" for purposes of determining if an alternative defined contribution plan maintained by the employer exists is determined at the time of the plan termination.  If the termination occurs before the sale, the mid-size company pre-sale and the controlled group containing the Conglomerate (and the mid-size company as a subsidiary) after the sale are not treated as the same employer.  That means Conglomerate's 401(k) plan is not an alternative defined contribution plan with respect to mid-size company's current plan.  What plan are you concerned about being an alternative defined contribution plan?

 

It also looked like 401 Chaos interpreted your comment as saying that the rules are different when a PEO is involved.  

With the facts stated, I agree there would not be a severance of employment.

 

[ETA Consulting LLC]

You have a dual employer in a PEO.  One entity (The PEO) is the employer for tax purposes and the other (the Company) is the common-law employer responsible for hiring and firing and controlling the work-flow of the employees.  So, the Common-Law employer is still the employer after leaving the PEO.

Otherwise, you could suggest this:  Let's say Company A has a plan with $3million in assets.  Let's suppose Company A joins a PEO and merges this plan into the MEP sponsored by the PEO.  Now, Company A can merely walk away and function as if it has no involvement whatsoever in their portion of the plan?  I don't think that is how is works.  They are still the employer; and merely joining a PEO doesn't diminish their roll as Employer.  So, without something to get around being an Alternative Defined Contribution plan or something to effectively create a severance of employment, then Company A is always going to be part of that portion of the plan.

Good Luck!

[TPAJake]

We've done a few of these & we always use the transfer/spinoff method mentioned above if possible.  The distribution/rollover dance is a recipe for unfinished rollovers & screwed up loans now, followed by 1099-R issues at year end.  And you're right, the PEO is not going to be much help to you.

[401 Chaos]

Thanks for everyone's comments on this.  

Just as a bit of an update, after discussing further with the PEO involved, their counsel indicated that under one of their 401(k) documents the CO's termination of participation in the PEO Plan immediately prior to the transaction might be treated as the target's termination of a 401(k) plan and thus a distributable event much like we would expect in a stock sale involving a non-PEO target terminating a single-employer plan.  (This suggestion that the answer may depend on the terms of the PEO plan used seems consistent with some other benefitslink posts on this topic.)

For better or worse, the target in our case was apparently not on the form of the PEO's plan that considers a participating employer's termination of participation in the PEO plan to essentially be tantamount to a plan termination.  As a result, I think we are clearly headed for a plan-to-plan transfer.  A couple of things struck me about that:  (1) why would a PEO not have such provisions in all of their 401(k) Plans such that the consequences of a client's termination of participation in the 401(k) depends on which form of plan they signed up under and (2) does it really make sense that the outcome here and the ability to treat a client's termination of participation as a plan termination turns on the express plan provisions?  

I may be reading too much into this but I get the sense that the PEO, etc. agrees that classification of a participating employer's termination in a PEO's multiple employer plan is a bit of a gray area and so decided to try and address by working in some deemed termination provision in a plan document they received a favorable determination letter for.  I get the dance plan sponsors sometimes do in situations like this but I'm not sure that prevents this from still being a gray area.  I always feel like these PEO plans involve situations where the industry / practice has gotten out ahead of the law to some degree.

Question for TPAJake and others that have done plan-to-plan transfers in these situations:  I assume you are generally required to transfer all plan accounts tied to the CO from the PEO plan to the other plan, including accounts for participants who have long ago terminated employment with the PO but elected to keep their accounts in the PEO 401(k) Plan?  Unfortunately, we have a very large number of termed participants in this case so are looking at potentially having to put a large number of individuals into the buyer's plan that never worked for the buyer unless there is some way to leave them at the PEO Plan or force them out. 

 

[TPAJake]

That's a good question--It would be nice to just leave all those low balance term's at the PEO wouldn't it?