Termination date for plan sponsor involved in asset sale

[cpc0506]

Client has just informed us that he sold his business back in February 2018.  It was an asset sale and last check issued by client was dated 2/23/18.

We are NOW doing the plan termination paperwork (a bit late, as you can see) and are having issues with termination effective date.  Normally you cannot terminate a 401k plan retroactively but I think using an October 30, 2018 date leads to incorrect pro-rata compensation for plan purposes.  Example, owner decides to pay himself 200,000 with last check in February.  If termination date is February 23th, then pro-rata compensation limit for plan purposes would be 40,684.93 (54 days out of 365 days).  But, if we use a 10/31/2018 term date, pro-rata compensation limit for plan purposes would be $229,041 (304 out of 365 days).  And since owner's compensation is 200,000, limitation compensation matters.

Any thoughts?

[Bird]

I don't have a problem with Oct 31.  In fact I think we've deliberately delayed term dates for the mathematical results you describe.  Would be curious to see others' thoughts...

[cpc0506]

Bird,

Does your answer change if I tell you that the plan is a safe harbor plan? 

[Kevin C]

I think you will find that 411(d)(6) prevents you from using a retroactive termination date.

 

We've done the same as Bird a few times when the plan sponsor continues to exist after an asset sale. There is usually some residual income to the sponsor from receivables at the time of the sale.   I think being safe harbor actually makes the situation better.  With the timing of the sale in this case, I don't think I would feel comfortable with a PS or match allocation to the owner if the plan has a last day (or 1,000 hour) allocation requirement when all of the employees were terminated with less than 500 hours due to the asset sale.  A safe harbor contribution  doesn't have that issue. 

 

 

[401_noob]

I like to use the summary chart in the attached (Page 5/6).

It says that with an asset acquisition the sellers plan may continue to operate or terminate, so I don't see an issue with the 10/31 termination either. 

My question would be since he is terminating it so far after the asset acquisition, will terminating the Safe Harbor Plan mid-year have the exceptions awarded for terminating the Plan due to a 410(b)(6)(c) transaction at this point. So would he get a pass on ADP testing and Top Heavy for 2018 since the asset sale happened in February, but he is terminating now?

Mergers and Acquisitions Considerations.pdf

[Bird]

3 hours ago, cpc0506 said:

Does your answer change if I tell you that the plan is a safe harbor plan? 

No

[Bill Presson]

Agree with the others that you can't retroactively terminate the plan. It's a good thing that it was an asset sale.

And I agree with both of Bird's answers. Ms Claire Rowland of Nixon Peabody and I just gave a presentation on M&A issues at ASPPA Annual.

[Luke Bailey]

A plan is not "terminated" until there is a resolution saying that it is, and that distributions will be made to all remaining participants as soon as administratively feasible. It sounds like what occurred here was a de-facto "freeze," because there was no more payroll after 2/23/2018, and presumably most of the funds were distributed based on employees' terminations of employment. I don't think this is a problem, and in fact you are terminating the plan now, so 10/31 is a good plan termination date.

[cpc0506]

Thanks to everyone for your responses.