Counting service with a predecessor ER--what entry date

[BG5150]

Company A, who has a 401(k) plan, buys Company B (with no plan) today, and they grant all service with Company B.  The plan has the standard 21/1/semi-annual entry.  When do the new EEs enter the plan, assuming they all satisfied the 21/1 requirements?  Can they be held out until 7/1, or do they have to be immediately  be eligible since they have their 1 yr of service and already have passed an entry date, similar to a rehired EE.

[Tom Poje]

that dusty copy of the ERISA Outline Book sitting on the shelf in your office had the following comment in Chapter 2, Section III Part F 2.e. but you probably didn't realize it was hidden in there.

2.e.Business transaction between prior employer and current employer is necessary element of the principles illustrated above. For the above service crediting rules to be applicable, there must be some business transaction between the prior employer and the current employer that results in a change in employer, such as a stock or asset sale, or a merger of companies, as described in 2.c. above.

 

2.e.1)May a plan credit service with a former employer in other circumstances? Suppose a newly-hired employee has not been employed as a result of a business transaction, such as an acquisition of corporate assets. May a plan nonetheless provide that service with that employee's prior employer is counted for eligibility purposes? There is no guidance on this issue. It would seem that if an employer wanted to design its plan to give employees credit for their service with their prior employers, it could do so. In such a case, the plan is being more liberal in crediting service to the employee than it has to be. However, this type of service grant must not result in prohibited discrimination in favor of highly compensated employees, which might be an issue particularly where the plan provides for the crediting of prior service for certain individuals and not others. See Treas. Reg. §1.401(a)(4)-11(d) and the discussion in Chapter 9 (Section XI, Part E) for more details.

 

2.e.2)Example - prior service granted for service with a particular prior employer. A medical practice (Professional Corporation A) provides for a one-year eligibility rule. On May 1, the practice hires Candace, a physician. Candace worked several years with Professional Corporation B, a company that is not related to A under the controlled group rules of IRC §414(b) and (c) nor under the affiliated service group rules of IRC §414(m). There has been no business transaction involving A and B that involve the acquisition of ownership or assets resulting in the transfer of employees. To lure Candace, A amends its plan to provide that service with Corporation B is counted toward satisfying eligibility under A's plan. This amendment will accelerate Candace's entry date into the plan to her May 1 commencement date with A. The rules in IRC §414(a), as set forth in 2.a. and 2.b. above, are not expressly applicable here. This amendment is likely to be considered discriminatory because it only benefits a highly compensated employee, and is not related to a business transaction between A and B. However, if along with Candace, Corporation A hires some of the nonhighly compensated employees of Corporation B, there may be a better argument that the amendment results in a nondiscriminatory crediting of prior service.

[BG5150]

I this case, there WAS a business deal between A & B--A bought B in my example.

I'll Look at that EOB section , though.  Thanks.

[Cardscrazy]

Normally, I'd argue acquisition shouldn't disrupt the target EEs deferral savings.  It would be more liberal to get them started in their new plan from the acquisition date.  However, in your example they had no 401(k) plan in target Company B.  Giving them time until 7/1 to get acquainted and educated and enrolled on their new 401(k) plan might be an alright thing to do.  With the new company added, Company A might want to rethink their investments and fee structures in their current 401(k).  I can see waiting to bring Company B into the fold having some merit from a business and HR point of view.  Does Company A have auto enroll?  I assume not.  I think if Company B were just like all new hires then 7/1 would be fine for an entry date and I think it works here too for an acquisition.  You might have to look at the negotiated sale agreement to see if Company B negotiated something different.  I'd like to see if Tom finds something different.  If Company A will continue with acquisitions then I'd recommend some policy drafting on this topic.

[Doc Ument]

Many preapproved plans provide for discretionary grants of predecessor service, so it seems to me you can do it, but I doubt that the plan document provides for, or can be construed as allowing, a second entry date waiting period.  If you would like a more precise answer, let me know.  I would  bring anyone in as you would do in a comparable rehire situation.

 

However, if it is not already too late to do so, the drafter can certainly impose a waiting requirement in an indirect manner. For example, a drafter could also put one or more acquired employees into a non-service-based excluded classification until an arbitrary later date, at which point the employee(s) will pop-in on that date (under your facts). Alternatively, the drafter could make the grant of such predecessor service effective as of a prospective date, e.g., the drafter could say something along the lines of "Effective July 1, 2019, service with Pamela's Pension Professionals (PPP) shall be granted to those employees of PPP who became employees of ABC Company (ABC) solely by reason of the acquisition of PPP by ABC on or any time prior to that date."  In that case, of course, any such acquired employee would need to still be an employee of ABC on 7/1/19 to enter on 7/1/19.

 

(Not every employer necessarily wants to limit service (as I have suggested) to only those who "come over" in a particular acquisition - but it's worth the drafter asking the employer if such language is desired before any broader discretionary grant of predecessor service becomes effective.  I have seen "unfortunate" fact patterns emerge from an unnecessarily broad grant, which typically occurs when a drafter just fills in the blank with the name of the "predecessor" companies.  The BPD might say that any service (whenever rendered) with the named employers will be counted.)

 

Nothing in this response is responsive to the issue of potential discrimination.

[Doc Ument]

To add to my earlier response, and in response to Cardscrazy, if the document provides language similar to the following, then an employer does not have the discretion to wait for an additional period of time beyond the latest time prescribed by regulation (citation upon request):

(a)    General rule. An Eligible Employee who has satisfied the conditions of eligibility pursuant to Section 3.1 shall become a Participant effective as of the date elected in the Adoption Agreement if employed on that date. Regardless of any election in the Adoption Agreement to the contrary, an Eligible Employee who has satisfied the maximum age (21) and service requirements (one (1) Year (or Period) of Service (or, with respect to contributions other than Elective Deferrals, more than one (1) year if full and immediate vesting)) and who is otherwise entitled to participate, will become a Participant no later than the earlier of (1) six (6) months after such requirements are satisfied, or (2) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date.

 

(c)    Recognition of predecessor service. Unless specifically provided otherwise in the Adoption Agreement, an Eligible Employee who satisfies the Plan's eligibility requirement conditions by reason of recognition of service with a predecessor employer will become a Participant as of the day the Plan credits service with a predecessor employer or, if later, the date the Employee would have otherwise entered the Plan had the service with the predecessor employer been service with the Employer.

 

[Luke Bailey]

In this circumstance we typically amend the plan to provide for eligibility on closing date. In the absence of an amendment, you may get there through interpretation. Would depend on the acquisition document, maybe. My guess it would be harder both interpretationally and practically to interpret to say they come in 7/1. But would again depend on documents.

[Kevin C]

BG, You'll get more specific answers if you provide more details.  Stock purchase or asset purchase?  Is Company B kept as a separate entity?  Or, does everyone become an employee of Company A? The details can also affect what needs to be done to get the desired result.