Anti-Cutback Issue for Mid-Year Safe Harbor Plan Termination Due to a Stock Sale

[KJJ-TPA]

I have a client who is being purchased by another entity, effective 11/16/2020. As these things usually go, we were just notified a couple days ago ? The seller (our client) sponsors a 401(k) safe harbor match plan. The buyer has required that the existing plan be terminated, prior to the effective date of the sale. Accordingly, the plan has an 11/15/2020 termination date. Our client runs monthly payrolls at the end of each month; the last payroll was 10/31/2020 and the next payroll date would be 11/30/2020.

My question is this - Is there any accrued benefit cutback issue with employees not being able to make deferrals and receive safe harbor matching contributions on the first two weeks of November? Or, is there no issue since the payroll date for that period of work falls on the other side of the sale/termination date? Does it make sense that the benefit isn't considered accrued until the payroll date? If so, I would assume it would follow the same logic as a plan who ends the safe harbor provision 12/31/2020 and then processes a payroll with a January 2, 2021 payroll date (without safe harbor). I just don't feel confident applying that logic to a plan termination without a rule to tie it to. 

[david rigby]

Do you need to correct any typos in the dates shown?

[KJJ-TPA]

I don't think so. I re-read the post, but I could be missing something...

[ESOPMomma]

On 11/6/2020 at 12:44 PM, KJJ-TPA said:

I have a client who is being purchased by another entity, effective 11/16/2020. As these things usually go, we were just notified a couple days ago ? The seller (our client) sponsors a 401(k) safe harbor match plan. The buyer has required that the existing plan be terminated, prior to the effective date of the sale.

To David Rigby's point, if the buyer is requiring the termination of the plan BEFORE the effective date of the sale, wouldn't that then mean 11/15/2020, not 12/15/2020???

[KJJ-TPA]

18 hours ago, ESOPMomma said:

To David Rigby's point, if the buyer is requiring the termination of the plan BEFORE the effective date of the sale, wouldn't that then mean 11/15/2020, not 12/15/2020???

Yes, thanks for catching that! The plan termination date should be 11/15/2020. I just updated the original post. 

[Bird]

I don't see it specifically as a cutback issue.  A safe harbor issue though, in a stock sale.

[EBECatty]

I have seen sellers run short payrolls through the date of termination/closing if they want to allow deferrals for as long as possible. I have also seen some process deferrals out of the first post-closing paycheck but only for compensation earned through the date of termination/closing. 

Alternatively, if you intend not to take deferrals from the final (11/30) paycheck, you can (could have?) terminate the plan on 10/31 if you're confident enough the closing will occur. 

[KJJ-TPA]

22 hours ago, EBECatty said:

I have seen sellers run short payrolls through the date of termination/closing if they want to allow deferrals for as long as possible. I have also seen some process deferrals out of the first post-closing paycheck but only for compensation earned through the date of termination/closing. 

Alternatively, if you intend not to take deferrals from the final (11/30) paycheck, you can (could have?) terminate the plan on 10/31 if you're confident enough the closing will occur. 

1. I consulted with an ERISA attorney and they confirmed there isn't a cutback issue as long as there is 30 days notice for the participants. They recommended the current owner run a short payroll through the termination/close date (as EBECatty mentioned in their comment). In this case,  the 30-day notice won't be possible, since the employer won't be announcing the company sale until the contract is signed and the ownership will be transferring within a week following the signing. The current owner sought a second opinion and consulted with an ERISA attorney through the M&A law firm how is handling the sale. This second attorney believes there isn't an issue with the less-than-30-day notice in this case. They commented that it's common in cases like this (safe harbor plan with a stock sale) to give a notice as soon as the contract is signed, provide participants with the details on their options for adjusting their deferral amounts for a short payroll period (through the plan termination date) and continue to fund the safe harbor match on deferrals up to the plan termination date. 

Thanks again to all of you who took the time to help!

[EBECatty]

The second attorney is correct.

[Kevin C]

The cite for 30 day notice not being required in your situation is 1.401(k)-3(e)(4). Note the or between (i) and (ii). Having a 410(b)(6)(C) transaction like you do puts you under (ii).  The 30 day notice is only required if you fall under (i).

[KJJ-TPA]

3 minutes ago, Kevin C said:

The cite for 30 day notice not being required in your situation is 1.401(k)-3(e)(4). Note the or between (i) and (ii). Having a 410(b)(6)(C) transaction like you do puts you under (ii).  The 30 day notice is only required if you fall under (i).

Perfect! Thanks Kevin!

[Bird]

18 hours ago, Kevin C said:

Having a 410(b)(6)(C) transaction like you do

Is this definitely the case?  It's a stock sale.  Being honest, I don't know for sure but the company still exists and I'm not quite sure that the underlying ownership matters...or maybe it does?  Is the upshot that the company itself, while changing hands, is not part of a controlled group (with itself) due to the change in ownership?

[EBECatty]

If memory serves, I believe one of the only times you don't have a 410(b)(6)(C) transaction is where stock is sold and there is no change in controlled group. For example, individual A owns 100% of the stock of Corporation A and there are no other affiliated entities under 414. Individual A sells 100% of the stock to individual B and, after the sale, there still are no affiliated entities. Maybe someone can opine if that is covered, but my recollection is there is no change of employer in that situation. 

Under code section 410(b)(6)(C)(i), the transition rule can be used "f a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414...."

Under regulation 1.410(b)-2(f), "[f]or purposes of section 410(b)(6)(C) and this paragraph (f), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business."

Since the buyer here is another entity, the employer being sold would at least "become" (and, perhaps, also "cease to be") a member of a different controlled group at closing. 

[Kevin C]

To be more precise, the safe harbor regs refer to a transaction described in Section 410(b)(6)(C). That's not the same as a transaction that qualifies for the transition rule in 410(b)(6)(C).  The transactions described, disposition or acquisition, are defined in 1.410(b)-2(f) to include stock purchases.  I don't see anything in the safe harbor regs that requires a change in the controlled group to have a short final safe harbor plan year.

 

 

[EBECatty]

Interesting. I agree there's nothing in the safe harbor regulation about changing controlled groups; it only refers to a "transaction described in section 410(b)(6)(C)." 

Section 410(b)(6)(C) never describes a stock or asset sale. The subsection heading is the only place that refers to an "acquisition or disposition." The text itself refers only to movement among controlled groups.

The regulations define acquisitions and dispositions to include stock acquisitions, but I read the last sentence as requiring not just a stock acquisition but rather a "stock acquisition...involving a change in the employer of the employees of a trade or business." In other words, a "transaction described in section 410(b)(6)(C)" is a "stock acquisition...involving a change in the employer of the employees of a trade or business."

I think that covers the vast majority of M&A situations where the employer would want to terminate a safe harbor plan so there is likely little daylight between the two interpretations. Although I can't get it unstuck from my mind that there's IRS guidance stating that a sale of stock between two individuals (neither of whom have any related entities) does not cause a change in employer, which would be one of the only times that the distinction would make a difference. I may be misremembering. 

[cheersmate]

On 11/12/2020 at 1:44 PM, Kevin C said:

To be more precise, the safe harbor regs refer to a transaction described in Section 410(b)(6)(C). That's not the same as a transaction that qualifies for the transition rule in 410(b)(6)(C).  The transactions described, disposition or acquisition, are defined in 1.410(b)-2(f) to include stock purchases.  I don't see anything in the safe harbor regs that requires a change in the controlled group to have a short final safe harbor plan year.

 

 

Kevin -  The seller retains Safe Harbor status for the short plan year due to plan termination (in the above example it would be 1/1/2020 - 11/15/2020) since the termination is on account of a stock sale to occur on 11/16/2020, correct?