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How to handle testing refunds of seller in a stock purchase.


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Buyer is purchasing Seller in a stock transaction.  Seller has agreed to terminate Seller's 401(k) Plan immediately before the closing.

After closing, Seller will perform final testing and make any necessary refunds.  Is it possible to refund through payroll so the participant's W-2 is accurate, or must it be handled by 1099?

For example:  Before closing, Employee defers $22,500 in Seller Plan.  After testing, Employee receives a $6,000 refund.  After closing, Employee defers $6,000 to Buyer Plan.  Would Employee's W-2 show $28,500 in the 401(k) Box (since payroll provider is the same), and also receive a 1099 to show the $6,000 refund?  Or can we just adjust the W-2 to show $22,500 in deferrals for the year?

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I think you must do the refund with 1099R reporting and the W2 reflecting the total deferrals. The W2 deferral reporting for the buyer's plan reflects what was deferred to that plan and should be totally independent of what went on at the seller level.

That is, and others may know better and correct me if I'm wrong, but getting a refund/corrective distribution of salary deferrals from one employer doesn't give me more 402(g) room in another employer's plan. If they maxed out in seller's plan then anything deferred further in the buyer's plan puts them over the limit.

BUT, then the individual can designate the plan from which their excess (>402(g)) gets distributed and I believe their ADP failure refund may also be applied toward their 402(g) refund - which indirectly does ultimately get you where you want to be, but with all deferrals hitting W2s and corrective distributions on 1099Rs.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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