Stock Purchase Question

[Madison71]

Good Morning -

Company A sponsors a 401(k) plan with a safe harbor match with a 12/31 plan year end.  Company B is a participating employer.  It is a calendar year plan.  Company A and B were part of a controlled group until Company B was sold in a stock sale to unrelated parties in January 2019.  New owners of Company B mistakenly thought they could continue to participate and remitted January deferrals into the plan.  Those deferrals were returned by Company A essentially freezing them from participating in the plan and Company B returned to the employees providing notice that deferrals were not being accepted into the plan.  Company B is now looking to establish its own safe harbor plan.  There is the question of whether this should be started as a new 401(k) plan with a safe harbor match or a spin-off of an existing plan.  If a new plan, I think there would be an issue of violation of the successor plan rules.  If a spin-off, then you have the operational failure of the missed opportunity for deferrals and missed safe harbor contribution issue.  I guess if spin-off, it is possible to use the safe harbor correction under EPCRS of 25% of missed deferrals and 100% of missed match, plus earnings if provide notice within 45 days of correct deferrals.  I would appreciate hearing everyone's thoughts on this.

Thanks!

[Kevin C]

When was the plan amended to remove Company B as a participating employer? 

[Madison71]

Not sure if it ever was as it’s with another provider.  We would be taking over new plan and spin-off if that’s the direction.  

[Kevin C]

Before you get too far down the road of looking at corrections, I would find out if Company B was properly removed from the plan.  A safe harbor plan is not allowed to have a mid-year amendment that narrows the group eligible for the safe harbor contribution. See Notice 2016-16, III D 2. An improper mid-year amendment causes the plan to fail to satisfy 1.401(k)-1(b), which is a qualification requirement. See 1.401(k)-3(e)(1), second sentence.   If they did it mid-year, Company A has a qualification problem with their plan and their correction should take care of your issues.

If Company B was properly removed from the plan (amended by 1/1/19 and effective 1/1/19), then Company B's new plan would be a successor plan and not eligible for a short initial plan year.  As you note, making Company B's new plan retroactively effective to 1/1/19 means that participants were (retroactively) improperly excluded, which needs to be corrected. I'm not convinced that you can have a spin-off retroactive to 1/1/19.