Acquisition and 401(k) Sponsorship complicated by a SIMPLE IRA plan

[ldr]

Good afternoon to all,

Our client, a P.A. we will call Company A, sponsors an active 401(k) plan.  Very soon (like in 2 weeks), Company B is buying Company A.  Company B, not currently our client, sponsors an active SIMPLE IRA plan.

Company A will continue to exist and pay salaries to its owners out of receivables through 12/31.  The staff of Company A will be paid by Company B from 08/15/2018 forward.  The owners of Company A will continue to make deferrals out of their salaries but the employees of A will no longer have any mechanism for making deferrals to A's plan.

Company A, in a perfect world, would have liked for Company B to assume sponsorship of Company A's existing 401(k) plan, open it up to all of Company B's employees, and move forward with as little disturbance as possible.  However, we are pretty sure that Company B can't have a SIMPLE IRA and assume sponsorship of a 401(k) plan in the same year.

Company A's next preference would be to have Company B take over the existing 401(k) plan as of January 1, 2019.  This leaves the employees of Company A without a way to make deferrals from 08/15 through 12/31 since they have no pay coming from Company A anymore after 08/15.  Is that permissible, to just suspend their ability to make deferrals and then have them be able to once again on January 1?  

Has a partial plan termination been triggered by the change of how the employees get paid as of 08/15/2018?  

If it matters, most of the employees of A will still be employed, by B, as of 08/15/2018, but not necessarily in the same jobs they had before.

It should be noted that at this moment we do not know (and neither does our client) whether this subject is addressed in the buyout agreement and we do not know the wishes of Company B. 

Any advice on the correct way to handle this will be greatly appreciated! Thanks in advance.

 

[WCC]

Is this an asset purchase or a stock purchase?

Here is a similar discussion if this is a stock purchase.

 

[ldr]

@ WCC  This is an asset purchase, per our client.

[ldr]

@WCC I did see this conversation yesterday when I was searching the forum for previous discussions.  It did not seem to apply to my situation because it's an asset purchase and because the intended survivor is the 401(k) plan, not the SIMPLE.

[Lou S.]

Since it is an asset sale would B keeping the SIMPLE-IRA for 2018 and starting a new 401(k) plan for 2019 and A terminating it's 401(k) Plan as of 12/31/2018 be an option?

If so that might be the path of least resistance. Not saying it would make all parties happy just might be the easiest solution.

[ldr]

@Lou S. I was beginning to think the same thing yesterday as I was typing our all of this to ask the question.  Naturally we'd like to do whatever our client wants if it is possible, so that's why the question is posted here - we simply don't know whether or not what they want can be done.  

What our client wants is to know what is legal and possible and then "steer" company B into doing what is best for Company A.  We have to meet with our client soon and give them the possibilities, let them choose their preference, and then meet again with our client and Company B to lay it all out.

Company B probably intends to keep their SIMPLE IRA and go on making deferrals to it through the end of the year.  Are they required to keep it?  Can they terminate it and take over our client's 401(k) plan as of 08/15/2018?

I can see several different ways this can go, but it depends upon what's legally permissible.  We may end up having to engage an ERISA attorney to make that determination but we were hoping not to have to do that.

 

[WCC]

1 hour ago, ldr said:

Company B probably intends to keep their SIMPLE IRA and go on making deferrals to it through the end of the year.  Are they required to keep it?  Can they terminate it and take over our client's 401(k) plan as of 08/15/2018?

Yes, they are required to keep it. No, they cannot terminate it mid year.   https://www.irs.gov/retirement-plans/terminating-a-simple-ira-plan

 

[Lou S.]

WCC is correct, B taking over the 401(k) Plan in 2017 will "disqualify" the SIMPLE-IRAs for 2018

I asked an unrelated SIMPLE-IRA/Qualifed Plan question the other day, I'd suggest looking at dan.jock's reply in that thread that would show the effects on the SIMPLE-IRA for B if they did take over the 401(k) Plan. The PDF is quite useful.

In this particular case I'm guessing B would not want to go through the kind of hassle that would be required at this point of the year if there is any kind of participant in the SIMPLE-IRA.

With respect to your question about possible partial termination for Plan A, if all of the employees except owners are being terminated by A and hired by unrelated employer B as a result of asset purchase, I'd be pretty confident Plan A has experienced a partial termination requiring full vesting of affected participants.

 

 

 

 

[ldr]

Thank you, Lou and WCC.  I did print off and read the pdf on correcting a SIMPLE where the employer adopts a 401(k) in the same year and I am certain that Company B will not be interested at all in doing this.  We were just hoping that there might have been some little-known exception to these rules in a merger and acquisition situation but I guess there isn't.

So it's sounding like they have a choice of having a partial termination of A's 401(k) plan that stays open for the owners through 12/31 and lets employees take a distribution or roll their funds out, followed by either 1) having Company B assume sponsorship of Company A's plan as of 01/01/2019, OR, 2) having Company A terminate their plan as of 12/31/2018 and hoping that we can create a new 401(k) plan for the combined companies as of 01/01/2019 or 3) having Company A terminate their plan as of 12/31/2018 and their former employees will be eligible to participate in the Company B SIMPLE as of 01/01/2019 if Company B cannot be persuaded to start a 401(k) plan or take over the existing one.

For our client, 3 is the least attractive proposition of all because they want the higher contribution limits afforded by a 401(k) plan.

We were also pretty sure that a partial termination is occurring at Company A, full vesting will be required, and participants will need to be allowed to make their choices.  Our client really didn't want this to happen, either, and wanted us to find a way around it if we could.  He's coming from a paternalistic viewpoint of wanting the employees to leave their money alone so they will have something for retirement instead of blowing it all now.

If anyone has any other ideas or perceptions, please speak up!

 

 

[ldr]

This  case took an interesting turn and I want to post the results in case some other reader has the same problem someday.  In reading ERISA Outlines, I came to the conclusion that due to transition rules for mergers and acquisitions, there is indeed an exception to the exclusive plan rule.  If Company B assumes the sponsorship of Company A's 401(k) plan, it does NOT invalidate Company B's SIMPLE IRA plan.  Company B would have up until December 31, 2019 to choose one of the two plans and get rid of the other one.  I called an ERISA attorney to get confirmation of all this and got further information.

She said to amend the 401(k) plan of Company A to exclude Company B's employees through the transition period.  She said to amend the definition of compensation in Company A's 401(k) Plan to include pay received from either Company A or Company B.  The Company B employees need to be notified that they are not eligible to participate in the 401(k) Plan and the Company A employees need to be notified that they are not eligible to participate in the SIMPLE IRA plan.  Finally, she said to put plenty of references to the transition relief in the Board of Directors Resolution.

To sum it up:  Company A's plan goes on operating normally, except that it gets a new sponsor, which is Company B.  The same employees that were in it pre-purchase are in it post purchase.  Company B's plan goes on operating normally with the same employees in it pre-purchase as post-purchase.  And all that is IF Company B is amenable to taking over A's plan.  But at least, it can be done.  There is no partial termination, no 100% immediate vesting , no excuse for the employees to take their funds out of the 401(k) plan.

Company B has up to the end of 2019 to decide what they want to do.  Stay tuned!