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Asset Sale - Plan Termination Date


NickG

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Company B is purchasing 100% of the assets of Company A.  All employees of Company A will terminate effective July 15.  Company A's 401(k) Plan is terminating.

Owners of Company A would like to make a discretionary profit sharing contribution to Company A 401(k) Plan for this final plan year.  

Even though the asset sale will occur on 7/15 and all employees/owners will terminate employment effective 7/15, can Company A elect to wait until 12/31 to formally adopt a resolution to terminate the plan, thus avoiding a reduction in the compensation limit, 415 limit, 1,000hrs allocation service requirement for PS, etc...?  As an added benefit, the employer would not have to provide top heavy minimum contributions since the limitation year would be extended to 12/31.

While I cannot find anything suggesting the plan is deemed terminated or must terminate as of the transaction date, it doesn't seem right that an employer could manipulate the staff funding requirements by postponing a formal plan termination.

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You probably have partial terminating on the date all the employees no longer work for company A. The practical implication being full vesting of affected participants how no longer work for Company A

While Company A will presumably no longer have common law employees, Company A will probably exist for some time for receivables and closing the corporation and the owners may even still draw a salary or bonus. I see no problem with terminating the Plan on 12/31/18 instead of 7/15/18, assuming there is a valid business reason which is likely easy to justify.

Now if they are trying to make the PS contrib for 2018 to owners and exclude all the employees under a last day rule, the allocation is almost certain to fail non-discrimination testing unless all the terminated employees are HCEs. If the Plan has fail safe language that language is likely going to pull back all the employees terminated on 7/15 back into the allocation of the PS contrib. But you'd want to read the terms of the Plan document to be sure.

 

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