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Merger and Missed Deferral Opportunity


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Company A acquired Company B through a stock acquisition 12/1/2021.  Company B has a 401(k) plan with a 3% safe harbor non-elective and immediate eligibility - Company A does not have a 401(k) plan.  Company B continued to operate as a wholly owned subsidiary, but it will formally merge into Company A on July 3, 2023.  410(b)(6)(C) for 2021 and 2022 is good - nothing has occurred that would eliminate the transition period relief.

It is now June 30, 2023, and your friendly local TPA was just hired to takeover from a bundled provider who has done nothing to address the acquisition.  The plan documents were never amended to have Company A adopt the plan as a participating control group member.  The Company A employees, who were never employed by Company B, have not been given the opportunity to participate.  If they tried to exclude these Company A employees, the plan would fail coverage in spectacular fashion.

Assuming we restate the plan documents effective 7/3/2023 to list Company A as the plan sponsor (since Company B will no longer exist), and all employees are given the opportunity to participate 7/3/2023:

1. Is there a missed deferral opportunity for those Company A employees who were never employed by Company B dating back to January 1, 2023, when the transition relief ended?

2. For Company A employees who never worked for Company B and terminated prior to 7/3/2023, will they need to be included in the 3% safe harbor non-elective in 2023?

3. I know this is open-ended, but are there any other issues that I should be considering?

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I think you are on the right track.  If the Plan will fail 410(b) for 2023 because it excludes Company A employees, the Plan should be retroactively amended to 1/1/2023 (not 7/2/2023) to have A adopt the Plan.  This is because you are giving the Company A employees a corrective contribution (for a missed deferral opportunity) for the period 1/1/2023 to 7/1/2023. You cannot give a corrective contribution to employees without first making them participants, and they cannot participate unless Company A has adopted the plan. To answer your second question, all Company A employees who would otherwise be eligible to receive a SH NEC under the Plan if Company A had adopted the Plan as of 1/1/2023 should be included in your corrective contribution (missed deferral opportunity). Hope this helps. 

 

 

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