401k Plan termination for a business being sold

[Santo Gold]

We have a small law firm that is being sold to a larger firm.  The small firms has a calendar year 3% safe harbor 401k Plan.  Lets say the sale date is April 1st, about 85 days away.

(1) can the plan set a termination date before April 1st?

(2) If we can set that date earlier, (say March 1st) the 3% safe harbor contributions can stop as of Match 1st, even though individuals are on payroll through April 1st?

Thank you

[justanotheradmin]

Ignore the sale for a moment, and ask the same questions. 

• Can the plan terminate as of March 1?
  • how is safe harbor impacted?
• If yes, what is the last pay date that is included as plan compensation?
  • Typically this would be the last pay date on or before March 1 if that is the termination date. 

Once you figure out the answers to the questions above, then move on to the next question,.

• Does the pending/ anticipated sale change any of the answers? 

[Artie M]

Terminating a SH Plan mid-year generally requires amending the plan to stop contributions, giving participants at least 30 days' notice to adjust deferrals, making final SH contributions through the termination date, and then applying ADP/ACP testing for the short year unless (i) the plan termination is in connection with a 410(b)(6)(C) transaction or (ii) the employer incurs a substantial business hardship.  See Treas. Reg. § 1.401(k)-3(e)(4).  It seems the transaction might be able to meet the 410(b)(6)(C) rule. 

The practical question I have is that the small firm is taking a risk terminating the plan that far in advance of the closing.  No matter how sure they are that the deal will close, it may never close or the closing may be delayed.  In these situations, we normally advise terminating the plan "effective as of, and subject to and contingent upon" the closing and include language that if the closing doesn't occur, the plan is not terminated.   Of course, this is business call and up to the parties.

[david rigby]

Another Q that may have already been addressed by the parties:  Why terminate?  If the buyer will accept it, the seller can avoid the aggravation and expense of a plan termination.

[Peter Gulia]

Beyond Artie M’s suggested cautions:

Under the Treasury department’s rule, the exception from the safe-harbor regime’s full-year condition is “[t]he plan termination is in connection with a transaction described in [Internal Revenue Code §] 410(b)(6)(C)[.]” 26 C.F.R. § 1.401(k)-3(e)(4)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.401(k)-3#p-1.401(k)-3(e)(4)(ii).

Ending the target’s plan sooner than the § 410(b)(6)(C) transaction requires might call into question whether the termination is sufficiently “in connection with” that transaction.

In my experience, it’s typical for employee-benefit plans’ changes to be conditioned on the closing, and aligned in time with the business transactions’ effective time.

This is not advice to anyone.