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MEPs, PEPs & Plan Terminations


Greg Walker

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I'm doing some research for one of my clients and have a couple of regulatory-related questions regarding multiple employer plans, and plan terminations and conversions. I've pored through regulations, but I'm getting dizzy and could use some help. Here goes:

  1. Can you 'convert' a plan from a single employer plan to a different structure like a MEP (and eventually, when/if made legal, a PEP) and move all of the assets over without making it a distributable event?
  2. When a plan terminates, it creates a distributable event, I believe. Is there a way to convert these assets to a MEP - say like a 'mass rollover'?
  3. Finally, are there rules/regulations that prohibit starting a new plan within a short time window of terminating a current plan? If so, are there rules requiring 'grandfathering' of any specific provisions from the terminating plan?

Thanks for any help you might be able to provide.

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There is a lot going on in your post. 

It might be helpful to distinguish a classic plan termination (with everyone being paid out) and a plan merger (where the plan is combined in part or whole with another plan and ceases to exist as before).

A stand alone plan can absolutely merge into a MEP, or the reverse, do a spin off from an MEP. Sometimes an MEP happens when a former controlled group is no longer a controlled group, but the business entities still want to leave the 401(k) plan as is, which is fine. 

A plan termination doesn't always create a distributable event. If the plan is being merged into another plan, or a successor plan of some sort is created, there probably wouldn't be a a distributable event. The way I've seen it is the old plan just moves everything over to the new plan. 

If a new plan is started within a short time period (typically 12 months) of the old plan termination, and the new plan is a successor plan, yes protected Benefits, rights, and features should be analyzed, particularly as they pertain to the money that moved into the new plan (the non-distributable money)

I should point out, that for a simple plan merger of two stand alone plans, the money typically doesn't have to move right away. there is sometimes a rush or anxiety to get separate investment contracts combine on the exact day the merger is effective, but plans are allowed to have multiple investment contracts in the trust, and usually the accounts are actually physically consolidated a short time after the plan amendments / resolutions etc are effective. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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I should caveat that my thoughts are based on DC plans. The way it would work for DB plans is similar, but different. 

As for a Pension Equity Plan, I'm not familiar with them, and I don't think a regular DB plan with an annuity based benefit would be easily converted to a PEP, if at all. I would think that would be similar to converting a traditional pension plan to a Cash Balance plan, no? Which I've never done. I'm not an actuary, so hopefully someone else give their insight. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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I will address only Greg's first question, and further limit it to MEPs. In my mind, there are two kinds of MEPS.  There is the PEO-style MEP, and I have no input on  such plans at this time because the facts can become hard to discern from a distance.

If, though, you have a simple fact pattern of a very few companies sharing a common plan document, there might be no "conversion" required.

You need not declare a plan to be a MEP in order for it to be a MEP.   All you need is a document that has MEP provisions and that grants the authority for non-related employers to adopt the plan.  Such a plan simply turns from a single-employer plan into a MEP when there is a triggering event, such as when an unrelated employer adopts the plan, or when two related companies that have already adopted the plan cease to be related employers but continue to share the document.

You have a potential problem, though, only when the document does not cover the possibility of its becoming a MEP.  In that case, the "conversion" could be a simple and timely amendment (ideally before the plan becomes a MEP) to address MEP administration.  On the other hand, a document that does not allow for MEPs might nonetheless provide a grace period for adopting a plan that contains MEP provisions, such as I've seen in some standardized prototype plans that allow for a prompt adoption of a non-standardized AA for use with the same basic plan document (i.e., the standardized AA precludes non-related companies from adopting the plan, but the BPD contains MEP provisions and contains that grace period, so all that is required in that case is for the employers to quickly switch to a non-standardized AA associated with that BPD.  So, as always, the first step in a "conversion" is to determine what the document already says or doesn't say.  Of course, the employer is free to use any document from any provider, I am just saying that there is often a simpler solution.

My primary point being that there might be no overt "conversion" required for a plan currently being administered as a single-employer plan that must change its administration to conform to the plan's MEP provisions.   A plan might be a MEP even if there is no MEP option on the AA.   And even if there is a MEP question on the AA, that might be for record keeping convenience, and not because it is necessary to make that election in order for the BPD's MEP provisions to be triggered.   Such questions are best addressed to the document provider.

Other plan documents, of course, shout "MEP" from the get-go, and serve primarily as a vehicle for a PEO-style MEP, in which case, changing from a single-employer plan to another provider's MEP would truly be a conversion, though much of the conversion would be digging in the weeds.   The actual differences between a document designed only as a single-employer document and a document for a PEO are typically not that voluminous.   (The differences that having nothing to do with MEP status might be voluminous, as in the case of any "takeover" document.)

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Thank you for the information here. It's terrific. Mind if I ask a few follow-up questions?

  1. Just to clarify, the adoption of the plan by the employer, wouldn't require a plan termination?
  2. If not, are there requirements to keep certain provisions (grandfathering) from the previous plan? I'm wondering about spousal consent among other things.
  3. If plan termination is required, would the plan adopted by the employer fall under 'successor-plan' rules?
On 8/28/2018 at 11:24 AM, Greg Walker said:

I'm doing some research for one of my clients and have a couple of regulatory-related questions regarding multiple employer plans, and plan terminations and conversions. I've pored through regulations, but I'm getting dizzy and could use some help. Here goes:

  1. Can you 'convert' a plan from a single employer plan to a different structure like a MEP (and eventually, when/if made legal, a PEP) and move all of the assets over without making it a distributable event?
  2. When a plan terminates, it creates a distributable event, I believe. Is there a way to convert these assets to a MEP - say like a 'mass rollover'?
  3. Finally, are there rules/regulations that prohibit starting a new plan within a short time window of terminating a current plan? If so, are there rules requiring 'grandfathering' of any specific provisions from the terminating plan?

Thanks for any help you might be able to provide.

 

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38 minutes ago, Greg Walker said:

Thank you for the information here. It's terrific. Mind if I ask a few follow-up questions?

  1. Just to clarify, the adoption of the plan by the employer, wouldn't require a plan termination?
  2. If not, are there requirements to keep certain provisions (grandfathering) from the previous plan? I'm wondering about spousal consent among other things.
  3. If plan termination is required, would the plan adopted by the employer fall under 'successor-plan' rules?

 

Is your fact pattern that there is an existing, single employer plan, and the plan sponsor wants to instead participate in an MEP? 

Well - in theory the employer could sponsor both a stand-alone single employer plan AND participate in an MEP, though unless the employer was large and there was a compelling business reason to do so, it would be very impractical. Employees would have access to two plans, testing issues, etc. 

So if the desire is to get rid of the stand alone plan, the sponsor should

1. work with the MEP master sponsor such that it accepts the merger of the old stand-alone plan, including tracking money types, (I guess I'm assuming this is a DC plan), protecting required provisions etc. and all of that is reflected in the adopting agreement that the employer signs as part of the MEP plan document. 

I would hazard a guess that most PEO style MEPs aren't going to have a flexible enough document to do all of that. But assuming that is possible, then -

2. The existing stand-alone plan will need an amendment / resolution stating that it is merging into the MEP and ceasing to exist as of whatever date. There will be some transition accounting, testing issues, asset transfer, etc

Alternatively, the existing stand alone single employer plan could go through a traditional termination and closure, and then wait the year, and then join the MEP. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

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With respect to successor plan rules, under Code Section 401(k)(10), I believe a distribution cannot be made in connection with a 401(k) termination if the employer maintains another DC plan.

With that in mind, can a multiple employer plan be the successor plan? Does that qualify as a plan 'maintained' by the employer?

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