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Plan Term - 401(k) Contributions Continue


Lou S.

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Well new one for me. Have a client that was bought. Recently told "Oh hey we were bought as of X" where X is a date in the past.

Part of the selling agreement which they just sent me had resolutions terminating the Plan as of date before acquisition. Not prepared by us. Buyer is taking the position that that is formal plan termination.

Seller decides on his own that since they aren't in the buyers plan he's going to continue deferral and safe harbor match and deposits first 2 January payrolls to the Plan.

What is the fix? Can this be self corrected? or does this require VCP?  

Do the deferrals after term date get paid out as like a 415 excess? they ran through payroll so will presumably be on 2023 W-2.

What happens to the match that was deposited? Forfeit? Allocate as prior year contribution? Return to client as mistake of fact?

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Before you turn to your questions (and perhaps some others), you might consider who has authority to make decisions in administering seller company’s plan.

Assuming seller company’s plan names seller company as the plan’s administrator:

If buyer company bought shares of seller company, it seems likely that buyer company controls all or most rights to manage seller company, likely including seller company’s powers to administer seller company’s plan.

But if buyer company bought assets from seller company, powers to administer seller company’s plan might have remained with seller company.

You might prefer to wait on analyzing potential plan-administration adjustments until you know from whom you get your engagement and scope.

And who has authority to pay, and has paid, or will be obligated to pay, your fee.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Peter thanks for your input.

Let's assume for now fees will be paid and that I will be asking for payment in advance or at least a retainer for anticipated services and assume that all fees for the prior year have been fully paid. And if that is not the case I'll finish up 2022 and resign, they can find someone else to close the Plan out.

The Buyer acquired the Seller in a stock purchase and Seller is now a wholly owned subsidiary of Buyer, at least that's what I've been told. So Buyer now has authority. The position they appear to be taking is that the selling agreement had a clause that the Plan is terminated the day before the acquisition which was executed by Docusign by the Seller when they still retained authority over the Plan.

Assuming their position is correct, it brings me back to my original question if the Plan is in fact legally terminated as of 12/31/2022, what do do with the January deferral and match that are clearly run through payroll, deducted, and deposited post-termination?

This could have been avoided had they involved me at the time of the acquisition but they chose not to. So I don't really want to make their problem my problem but if I can be paid to be part of the solution, I am not opposed. As long as I know what the correct solution to propose is in this case.

 

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And as a followup since they are a wholly owned subsidiary if the Plan is in fact terminated the employees would be subject to the successor Plan rules and prohibited from starting a new 401(k) for 12 months following the final distribution of assets from the Plan? And I would assume this would apply to them joining a PEO as well?

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My wider point is that an adviser—no matter how great her knowledge, methods, and skills—cannot render good advice until she knows the identity of the advisee and learns the advisee’s goals and interests.

In the situation described, the seller and the buyer might have diverging interests—at the least, one ought to recognize that possibility.

A search for “the correct solution” is not in the abstract. Which solution is fitting depends on what one’s advisee hopes to accomplish.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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3 hours ago, Peter Gulia said:

In the situation described, the seller and the buyer might have diverging interests—at the least, one ought to recognize that possibility.

A search for “the correct solution” is not in the abstract. Which solution is fitting depends on what one’s advisee hopes to accomplish.

Oh I think that it is a given that seller and buyer have different ideas about what was supposed to happen and how they want to resolve going forward.

I was just hoping there might be some kind of road map on how to proceed. I mean I have some ideas but none that I know for sure are kosher so to speak so I think Bill Presson may have hit the nail on the head.

But is anyone has gone through something like this before and would like t o share how it was resolved I'd be all ears.

Thanks for everyone's input.

 

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