Partial plan term for participating ER?

[justanotheradmin]

A two company control group is ending as of 12/31/2019. Both participate in a 401(k) plan together. The main sponsor would like to kick out the participating ER at the end of the year. The Participating ER will likely voluntarily end it's participation in the plan anyhow. They aren't ready to have a new plan of their own. 

The plan document (yes I read it) is silent on this exact scenario. The participating ER MAY  choose to set up a successor /spin off plan. But nothing in the document says they have to. 

I think the old rule was, the discontinuance of an ER doesn't necessarily create a partial plan termination or distributeable event because the employee's haven't terminated employment. But I thought there was a narrow circumstance where it could be considered a partial plan term and distributable?  

Am I imagining this possibility? Anyone know the rules? Point me in the right direction? 

[Kevin C]

There was some old guidance that moving participants from a money purchase plan to a profit sharing plan doesn't necessarily create a partial plan termination, but I don't think that helps here.  Rev. Ruling 2007-43 discusses partial plan terminations under 1.411(d)-2(b).

[Larry Starr]

21 hours ago, justanotheradmin said:

A two company control group is ending as of 12/31/2019. Both participate in a 401(k) plan together. The main sponsor would like to kick out the participating ER at the end of the year. The Participating ER will likely voluntarily end it's participation in the plan anyhow. They aren't ready to have a new plan of their own. 

The plan document (yes I read it) is silent on this exact scenario. The participating ER MAY  choose to set up a successor /spin off plan. But nothing in the document says they have to. 

I think the old rule was, the discontinuance of an ER doesn't necessarily create a partial plan termination or distributeable event because the employee's haven't terminated employment. But I thought there was a narrow circumstance where it could be considered a partial plan term and distributable?  

Am I imagining this possibility? Anyone know the rules? Point me in the right direction? 

Please be more specific.  Company A is the sponsor; Company B is an additional adopter of the plan.

Does Company A want to continue their plan and Company B will terminate participation and not start a new one?  I will assume so.

The plan needs to be amended to eliminate Company B as a participating employer. That leaves Company A still as the sponsor and still with the plan.

The employees of A do not have any change at all.  The employees of Company B have their plan terminated and, yes, they will become fully vested and subject to payout.

Does that handle your questions?

[Luke Bailey]

justanotheradmin, if I were you I would citate 1.411(d)(2) and look for cases or rulings. My first guess as to the analysis of your situation here is not based on a headcount reduction, but rather that the withdrawing employer is going to have a complete cessation of contributions and therefore that withdrawing employer's (but not nonwithdrawing employer's) employees need to become fully vested. Of course, if you don't fully vest them then you would need to include provisions counting service of the withdrawing employer (which will no longer be an adopting employer) for purposes of allowing the employees of withdrawing employer to continue to vest in plan, otherwise the nonwithdrawing employer's employees would get the forfeitures, right? That would not make sense. But again, my guess would be that 1.411(d)(2) requires full vesting of the withrdrawing employer's employees.

[justanotheradmin]

19 hours ago, Larry Starr said:

The employees of Company B have their plan terminated and, yes, they will become fully vested and subject to payout.

Does that handle your questions?

No, it doesn't quite answer my question. Neither company has a problem with the 100% vesting, I should have mentioned that in my original post. 

My question is - what is the distributable event for the Employees of Company B? 

They are still employed. What support does Company A have to allow distributions for Company B employees? 

I think the example I am relating it to is a company that has a plan that covers several different divisions of employees, but not divisions. If an employee switches divisions, or alternatively the plan is amended to no longer allow a particular division's employees to participate, I don't recall any way for those participants to take a distribution (unless otherwise eligible for an in-service withdrawal). 

Is this somehow different because it is a separate employer? Company B will not be part of the control group as of 1/1/2020

[Luke Bailey]

OK. I could be wrong, but I think under current law and regs you are stuck (i.e., can't distribute) unless you go through the steps of a spinoff termination. If you don't go that route, then hopefully the plan has language that would treat an employee's termination of employment with the former sponsor as a distributable event even after it's withdrawn.

[justanotheradmin]

2 minutes ago, Luke Bailey said:

OK. I could be wrong, but I think under current law and regs you are stuck (i.e., can't distribute) unless you go through the steps of a spinoff termination. If you don't go that route, then hopefully the plan has language that would treat an employee's termination of employment with the former sponsor as a distributable event even after it's withdrawn.

Thank you, that's the confirmation I was looking for. I was wondering if my memory was correct or if something had changed. Usually the documents I see have a mandatory spinoff in which case it is easy to formally terminate the plan and distribute. This document does not have such a provision. And I've been in this industry long enough to see the laws change many times on most everything, so I figured I should ask before I assumed these rules were the same as when I learned them at the start of my career. 

If anyone else has some other insight that differs from my and Luke's understanding, please share. @Larry Starr? @Kevin C?

[Larry Starr]

3 hours ago, justanotheradmin said:

No, it doesn't quite answer my question. Neither company has a problem with the 100% vesting, I should have mentioned that in my original post. 

My question is - what is the distributable event for the Employees of Company B? 

The termination of the retirement plan as it relates to Company B.

They are still employed. What support does Company A have to allow distributions for Company B employees? 

They are no longer participants in the plan.  They have terminated from the plan that was previously adopted by both A and B.

I think the example I am relating it to is a company that has a plan that covers several different divisions of employees, but not divisions.

Don't know why you would relate it to that; it is not at all a similar situation.  

If an employee switches divisions, or alternatively the plan is amended to no longer allow a particular division's employees to participate, I don't recall any way for those participants to take a distribution (unless otherwise eligible for an in-service withdrawal). 

Correct, but not germaine.

Is this somehow different because it is a separate employer?

That is exactly why it is different.

Company B will not be part of the control group as of 1/1/2020

 

[justanotheradmin]

@Larry Starr

If all it took was being a separate employer in a plan to allow for distributions upon discontinuance, MEPs wouldn't have to go through the exercise of spinning off employers into single employer plans to then terminate them every time an employer ceased participation in the MEP. 

I'm not aware of a partial plan termination - in and of itself - being enough to allow distributions. Nor am I aware of an exception to that where a possible partial plan term is caused by the discontinued participation of an employer. Hence my question / hope that there was some exception or rule that WOULD allow distributions to those affected employees. 

More typically I see a partial plan termination occur because a number of employees have a severance event. They are then typically eligible for distributions because they are terminated. Not because they are 100% vested or because there was a plan termination. 

In my fact pattern - the employees are still employed. By the same employer as before. 

[Larry Starr]

On 12/13/2019 at 4:34 PM, justanotheradmin said:

@Larry Starr

If all it took was being a separate employer in a plan to allow for distributions upon discontinuance, MEPs wouldn't have to go through the exercise of spinning off employers into single employer plans to then terminate them every time an employer ceased participation in the MEP. 

I'm not aware of a partial plan termination - in and of itself - being enough to allow distributions. Nor am I aware of an exception to that where a possible partial plan term is caused by the discontinued participation of an employer. Hence my question / hope that there was some exception or rule that WOULD allow distributions to those affected employees. 

More typically I see a partial plan termination occur because a number of employees have a severance event. They are then typically eligible for distributions because they are terminated. Not because they are 100% vested or because there was a plan termination. 

In my fact pattern - the employees are still employed. By the same employer as before. 

This may have to wait until during the week when I am back in the office.  I see no reason why the TERMINATION of participation by the employer in a plan, so that now there is no plan covering that employer, is not a plan termination.  I believe the language in my document regarding adopting employers covers that issue.  I will TRY to remember to check during the week. I don't believe you have to do a "spin-off" to accomplish the same thing, so long as the appropriate language is part of the document or the amendment to "terminate" participation in this particular plan.  We shall see....

[Linda Wilkins]

I think your question about whether there is a distributable event is addressed in the definition of a severance from employment -  see Code section 401(k)(2)(B)(i)(1). 

This discussion is from IRS Notice 2002-4:

Under Code § 401(k)(2)(B)(i)(I), as amended by § 646 of EGTRRA, amounts attributable to elective contributions may be distributed upon the employee’s severance from employment with the employer maintaining the plan. For this purpose, the employer includes all corporations and other entities treated as the same employer under Code § 414(b), (c), (m), or (o). An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains the section 401(k) plan with respect to the employee (for example, by assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of Code § 414(l)) with respect to the employee). Thus, for example, if all employees of a controlled group of corporations (within the meaning of § 414(b)) are covered by a section 401(k) plan and a transaction occurs such that one subsidiary corporation in the group is no longer aggregated with other members in the group under § 414(b), (c), (m), or (o), and in connection with the transaction no assets are transferred from the section 401(k) plan to a plan maintained by the former subsidiary corporation, then, participants in the section 401(k) plan who continue employment with the subsidiary corporation will have a severance from employment with the employer maintaining the section 401(k) plan and may receive a distribution of amounts attributable to elective contributions from that plan. However, if the subsidiary corporation maintained a section 401(k) plan for its employees before the transaction and continues to maintain the section 401(k) plan following the transaction, the employees who continue employment with the subsidiary do not have a severance from employment with the employer maintaining the plan.

 

As you stated, the Plan document doesn't mandate that there be a spin-off/transfer of assets to a new plan maintained by the employer leaving the controlled group.  However, the Plan document includes the severance from employment definition.  If the employers agree on a spin-off/transfer, then it is not a distributable event when the subsidiary (?) leaves the controlled group.  Otherwise it is.

 

[Luke Bailey]

2 hours ago, Linda Wilkins said:

As you stated, the Plan document doesn't mandate that there be a spin-off/transfer of assets to a new plan maintained by the employer leaving the controlled group.  However, the Plan document includes the severance from employment definition.  If the employers agree on a spin-off/transfer, then it is not a distributable event when the subsidiary (?) leaves the controlled group.  Otherwise it is.

Linda, I think you're right. For some reason I had missed that justanotheradmin said that the withdrawing employer was coming out of a controlled group. I was thinking of this like a MEP. Thanks for pointing this out for justanotheradmin.

[justanotheradmin]

@Linda Wilkins Thank you! I KNEW there had to be some sort of exception related to the fact that the control group is ending. I just couldn't remember or put my finger on it. 

If the control group wasn't ending, I think the result would be different, but that's not my particular fact pattern. 

We will give the business the information and they can decide what they want to do (or not do). 

Thanks again! 

And Happy Holidays everyone! 

[Larry Starr]

On 12/14/2019 at 5:53 PM, Larry Starr said:

This may have to wait until during the week when I am back in the office.  I see no reason why the TERMINATION of participation by the employer in a plan, so that now there is no plan covering that employer, is not a plan termination.  I believe the language in my document regarding adopting employers covers that issue.  I will TRY to remember to check during the week. I don't believe you have to do a "spin-off" to accomplish the same thing, so long as the appropriate language is part of the document or the amendment to "terminate" participation in this particular plan.  We shall see....

OK: I stand by my original statements.  If a participating employer withdraws from participation and does not establish their own plan, then the participants from that employer are now terminated employees and distributions would be made the same as if they just plain quit.