Successor Plan Rule: 401(k)

[Idioteque9004]

I need some clarification. Someone in my organization (that we normally see as the expert) is saying that the rules for successor plans only apply to the business/EIN. In other words, if a company dissolves and opens a new LLC under a different EIN, they are not at risk of violating the successor plan rules.

 

I always thought that these rules also applied to ownership. Our director is saying that they don't. I thought the purpose of the successor plan rule was to prevent employers from cycling through retirement plans so they can't simply have a distributable event and then open another plan. I would think this applies to ownership as well, because what's to stop an owner from dissolving and creating new companies to terminate/start up a new plan?

 

Do you have any feedback? Is this person at my company correct? I don't want to dismiss the possibility that I might be mistaken, but I could really use a source that specifically mentions that the owner is exempt from this rule as long as the other company closes and the new plan is with a new company and EIN. All I can find uses the word "employer," and that seems vague in this particular instance. Again whether I am right or they are right, a source would really be appreciated. Thank you!

[Bird]

I always assumed that controlled group rules apply. I imagine using a different name or ID number would make it easier to "get away with" but...

[Idioteque9004]

24 minutes ago, Bird said:

I always assumed that controlled group rules apply. I imagine using a different name or ID number would make it easier to "get away with" but...

So you believe it is technically allowed? I would assume CG rules apply too but I guess the argument is there is no CG because the "Parent company" doesn't exist anymore. Still...it just doesn't pass the smell test, imo.

[Paul I]

You will need a lot more information about the old company, the new company, the plan sponsored by the old company, the disposition of that plan after the dissolution of the old company, the disposition of that plan after the formation of the new company, a plan sponsored by the new company, the employees of the old company that become employees of the new company, and more.  This is a complex situation the needs a careful review by legal counsel with expertise in plans involved in business transitions.

There are rules and guidance spread throughout various IRC sections related to business transactions that can be complex and can have a bearing on the analysis.  For example 1.415(f)-1(c)(2) points to a determination of a predecessor employer at an employee-by-employee level:

"Where plan is not maintained by successor. With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer."

This example is not definitive but does illustrate the type of issues that, depending on the facts and circumstances of reforming the business, could impact a plan.

A change in an EIN of a plan sponsor happens routinely in business transactions and also is not definitive.  Ultimately, risk of mishandling a plan or plans could rise to the level of disqualification of the old plan or a new plan, the cost of which would make seeking competent legal counsel a bargain.

[Belgarath]

If you are looking for a great source, you should obtain (or get access to) Derrin Watson's "Who's the Employer." Derrin deals extensively with Controlled Group/Affiliated Service group issues, and has examples that may well shed light on the specific situation that you are dealing with. 

[Bird]

1 hour ago, Idioteque9004 said:

So you believe it is technically allowed? 

No, not what I said or meant.

[G8Rs]

From the ERISA Outline Book: 

 

5.b.    Related employers treated as same employer to determine whether plan is a successor plan. Employers that are related under the controlled group of business definition in IRC §414(b) and (c), or under the affiliated service group definition in IRC §414(m), are treated as the same employer for purposes of determining whether another plan is a successor plan. See Treas. Reg. §1.401(k)-1(d)(4)(i) and the definition of employer in Treas. Reg. §1.401(k)-6 (December 29, 2004) (replacing regulations that stated the same rule). Also see Chapter 1B for details on these related employer definitions.

5.c.    Change in related group after the termination date of the 401(k) plan. Sometimes the makeup of the related group changes after the date the 401(k) plan is terminated. The change might be the result of the sale of assets of a business to another company, or the sale of stock in a corporation to another corporation, so that the buyer becomes the new parent company of the sold corporation. The employer (or related employer) is identified at the termination date of the 401(k) plan, to determine whether the employer that maintains the successor plan is the same employer. See Treas. Reg. §1.401(k)-1(d)(4) (December 29, 2004) (replacing regulations that provided the same rule). Rev. Rul. 89-87, 1989-2 C.B. 81, will generally recognize a plan’s stated termination date as valid, so long as final distribution of assets is completed within a reasonable period of time (usually no more than 12 months) after the termination date. Therefore, if the liquidation of the plan is completed in a timely fashion, the stated termination date should control to determine whether the company that sponsors the plan in which the employees are now participating is treated as the same employer who maintained the terminated 401(k) plan. See 5.d. and 5.e. below for a comparison of how this issue is analyzed in asset and stock acquisitions.