Asset Sale

[Chippy]

A current physician practice bought another practice in an asset sale.   the Assets of the benefits plans were not included in the sale.     May the new employer bring the employees of that plan into their plan immediately and count service with the prior employer for eligibility and vesting?    Is a plan amendment needed?   thank you

[Bill Presson]

Yes, you would need to amend the plan to give credit for prior service with the other employer.

[Larry Starr]

5 hours ago, Bill Presson said:

Yes, you would need to amend the plan to give credit for prior service with the other employer.

Absolutely; that's the way you do it.  You can give credit for eligibility and vesting, or just eligibility (I almost always do both; why would he want to "penalize" his new employees by not counting the years toward vestin?).

[D.J. Simonetti]

You have to make sure that the amendment does not discriminate in favor of HCEs. That is, for every HCE that is affected by the amendment, at least one NHCE must be affected by the amendment.

[Bill Presson]

4 minutes ago, D.J. Simonetti said:

You have to make sure that the amendment does not discriminate in favor of HCEs. That is, for every HCE that is affected by the amendment, at least one NHCE must be affected by the amendment.

Welcome to the forum, DJ!

We should get together for lunch and gossip about people we don't like anymore.

?

WCP

[Mike Preston]

4 hours ago, D.J. Simonetti said:

You have to make sure that the amendment does not discriminate in favor of HCEs. That is, for every HCE that is affected by the amendment, at least one NHCE must be affected by the amendment.

Elaborate please. 

[Chippy]

They are    going to bring in all the employees of the new company.    I think its 1 HCE and 8 NHCE.   No discrimination as long as they met eligibility. 

[D.J. Simonetti]

Mike, the amendment will discriminate in favor of HCEs if the number of HCEs who benefit from counting prior service exceeds the number of NHCEs who benefit from counting prior service.

[Mike Preston]

1 hour ago, D.J. Simonetti said:

Mike, the amendment will discriminate in favor of HCEs if the number of HCEs who benefit from counting prior service exceeds the number of NHCEs who benefit from counting prior service.

I have never heard it expressed quite that way. Care to provide a cite? 

[Larry Starr]

3 hours ago, D.J. Simonetti said:

Mike, the amendment will discriminate in favor of HCEs if the number of HCEs who benefit from counting prior service exceeds the number of NHCEs who benefit from counting prior service.

D.J.: yeah, Mike nicely asked for a cite, but I (just as nicely) say there is no such rule.

[D.J. Simonetti]

No, there is no such rule but it does satisfy the requirement that a benefit, right or feature (or anything else) cannot discriminate in favor of HCEs. If at least one NHCE is affected by the amendment for every HCE affected by the amendment, the amendment does not discriminate in favor of HCEs.

 

Also, as Bill Presson and one of my partners reminded me, all of the new employees will be NHCEs for the year of employment because their status as NHCE/HCE is based on their prior year's compensation from their new employer:i.e., zero.

[LRC]

Treasury Regulation § 1.401(a)(4)-11(d)(3)(iii) addresses the rules for granting such pre-participation service:

(iii)Requirements for pre-participation and imputed service -

(A)Provision applied to all similarly-situated employees -

(1)General rule. A plan provision crediting pre-participation service or imputed service to any HCE must apply on the same terms to all similarly-situated NHCEs. Whether two employees are similarly situated for this purpose must be determined based on reasonable business criteria, generally taking into account only the circumstances resulting in the employees being covered under the plan or being granted imputed service and on the situation of the employees (e.g., the plan in which the employees benefit or the employer by which they are employed) during the period for which the pre-participation service or imputed service is credited. For example, employees who enter a plan as a result of a particular merger and who participated in the same plan of a prior employer are generally similarly situated. As another example, employees who are transferred to different joint ventures or different spun-off divisions are generally not similarly situated.

(2)Examples. The following examples illustrate the rules in this paragraph (d)(3)(iii)(A) . . .

[Larry Starr]

1 hour ago, D.J. Simonetti said:

No, there is no such rule but it does satisfy the requirement that a benefit, right or feature (or anything else) cannot discriminate in favor of HCEs. If at least one NHCE is affected by the amendment for every HCE affected by the amendment, the amendment does not discriminate in favor of HCEs.

 

Also, as Bill Presson and one of my partners reminded me, all of the new employees will be NHCEs for the year of employment because their status as NHCE/HCE is based on their prior year's compensation from their new employer:i.e., zero.

D.J., Where do you get the justification for the following "rule": If at least one NHCE is affected by the amendment for every HCE affected by the amendment, the amendment does not discriminate in favor of HCEs. We are not allowed to just make up rules; there must be some authority. Do you have a cite for this or an explanation of how it meets some other rule? What if there are just two HCEs affected and all NHCEs are already participants? Are you saying that amendment is, de facto, bad?

[D.J. Simonetti]

I'm not making up a rule, Larry. No law can specify everything that it allows. Most laws only specify what they prohibit. ERISA prohibits discrimination in favor of HCEs. Counting prior service in the manner I described above is nondiscriminatory because it does not favor HCEs. Therefore, it does not violate ERISA's prohibition on nondiscrimination. It does not have to comply with a a provision of ERISA that specifically allows it. Although the reg quoted by LRC above is nice to know, it is not necessary to the result. Counting prior service as I described above is nondiscriminatory and therefore allowed even without the reg.

[Mike Preston]

14 hours ago, D.J. Simonetti said:

Therefore, it does not violate ERISA's prohibition on nondiscrimination.

I think you are presuming a certain population ratio of NHCEs to HCEs. If there were 999 NHCEs and only 1 HCE do you really think an amendment affecting the HCE and only one NHCE would be non-discriminatory? 

[david rigby]

17 hours ago, D.J. Simonetti said:

ERISA prohibits discrimination in favor of HCEs. 

Oversimplified (hence misleading).  ERISA (et al) limits the degree of discrimination, but does not prohibit it.

[D.J. Simonetti]

7 hours ago, Mike Preston said:

I think you are presuming a certain population ratio of NHCEs to HCEs. If there were 999 NHCEs and only 1 HCE do you really think an amendment affecting the HCE and only one NHCE would be non-discriminatory? 

Yes, at least re counting prior service. The language of the reg sited above is clear in that regard. The absolute number of HCEs and NHCEs who are simply covered by the plan doesn't matter. What matters is the number of NHCEs and HCEs who are affected by the amendment .

[D.J. Simonetti]

4 hours ago, david rigby said:

Oversimplified (hence misleading).  ERISA (et al) limits the degree of discrimination, but does not prohibit it.

Point taken. "ERISA prohibits impermissible discrimination in favor of HCEs." 

[Mike Preston]

2 hours ago, D.J. Simonetti said:

Yes, at least re counting prior service. The language of the reg sited above is clear in that regard. The absolute number of HCEs and NHCEs who are simply covered by the plan doesn't matter. What matters is the number of NHCEs and HCEs who are affected by the amendment .

Well I guess it is time to just agree to disagree. 

[SoCalActuary]

I never saw DJ mention "percent of HCE vs NHCE" affected.  His facts say all 8 NHCE are going to be covered, so we may be beating a dead horse, but discrimination is not about counting one for one.

 

[D.J. Simonetti]

23 hours ago, Mike Preston said:

Well I guess it is time to just agree to disagree. 

Yep. I get that a lot from my wife.

[Chippy]

So if the new company has 10 employees, 7 hce and 3 nhce, all will be covered under the new plan.   Would that be discriminatory?