Contributions after asset sale by ineligible employer

[30Rock]

I have a question to present as there is no clear answer in EPCRS. There was an asset sale in April (4/2/26) and the employees were hired/transferred to the newly formed company with new EIN of the buyer. I have finally received confirmation by legal counsel that the buyer did not agree to take over the sellers 401k plan after the sale. However,  the newly formed company continued to contribute to the plan of the seller after the sale closed - deferrals and match. What is the correction here? Distribute deferrals to the employees as 1099 income for 2026, but what about the match? Normally under EPCRS excess amounts attributable to match would be forfeited but the match was funded by an ineligible employer since there was an asset sale. Following that line of correction, the match would be forfeited, the plan terminated by the seller, and then there will be forfeitures to deal with. So after any plan expenses, lets say that forfeitures remain. Do they get reallocated - Ineligible match contributed after the 4/2 asset sale by an ineligible employer gets reallocated to the participants? Or, could this be viewed as a mistake of fact and return the match to the buyer? I have not had this come up before, can one of you M&A experts chime in maybe?

Thank you !!

[Peter Gulia]

I don’t know what EPCRS or anything of tax law suggests for a situation like this.

Might the employer that paid purported contributions ask the receiving plan’s administrator and trustee to recognize the employer’s mistake of fact?

Might the employer’s assumption that the employer’s employees could accrue further benefits under a retirement plan of which the employer was not a participating employer be a mistake of fact?

Also, might the receiving plan’s administrator’s acceptance of the purported contributions be a breach of that administrator’s fiduciary responsibility? One imagines the receiving plan’s administrator knew, or had it used ERISA § 404(a)(1)(B) prudence would have known, that the payer was not a participating employer (and that the payer’s employee were not eligible for accruals attributable to amounts paid by a nonparticipating employer).

If there was a mistake, ERISA’s title I does “not prohibit the return of [a mistaken] contribution to the employer within one year after the payment of the contribution[.]” ERISA § 403(c)(2)(A)(i).

The receiving plan would return to the nonparticipating employer the amounts mistakenly paid in, each adjusted for investment loss but not for investment gain.

The receiving plan’s net-breakage gain might be allocated to the receiving plan’s account for plan-administration expenses.

The employer would pay its affected employees the wages due for the amounts that were not elective deferrals. Next January, the employer would report correctly W-2 wages paid in 2026.

The employer would pay each affected employee an interest or time-value-of-money amount on the wages not timely paid, or, if the greater, the amounts each applicable State wage-payment law provides.

About the amounts paid for what was not a matching contribution under the mistakenly-receiving plan, the employer might use that money toward any nonelective or matching contribution obligation (if any) the employer has under a retirement plan of which the employer is a participating employer.

This is not advice to anyone.

[30Rock]

Thank you Peter!

[Artie M]

What does the transaction doc say?  EPCRS = how to correct the mistake, but APA = what the correct result should be. In my view, that should drive the correction analysis.

Not sure what should be done but I would work toward putting everyone in the position they should be in if this problem didn't occur.  The big question I have is not provided in your facts:  does buyer or newco sponsor a 401(k) plan as of 4/2?  If yes, were the affected employees eligible for the seller/newco 401k or after a short waiting period?  If they should (or perhaps ever could) be participating in buyer/newco plan, I would ask seller to transfer the elective deferrals (and earnings), the matching contributions (and earnings to the buyer/newco plan.  (Seems like someone thought deferral elections carry over.)

If there is a buyer/newco plan but a transfer is not technically available, the seller should return the contributions and buyer/newco should make corrective contributions to a buyer/newco plan.  

If newco/buyer doesn't have a plan, the deferrals should not remain in seller's plan... seller's plan has an operational failure.   Those funds don't belong in seller's plan.  Why should seller profit off this?  Also, seems like it cant leave the money in the trust... presumably, that would be inconsistent with plan docs, transaction docs, and the parties' intent.  For example, if buyer accidently wired $500K to the seller 401k trust, seller can't say... oh well, it's in the trust now.  The trust only exists to hold assets for participants who are entitled to benefits under the plan--these individuals weren't participants.  (I think there is a line of authority and trust law that distinguishes between where money is a plan asset and whether the plan has a right to retain it. but i have not looked at those in a long time.  there is a subtle distinction here, especially from a fiduciary perspective.)

If there is no qualified plan available seems like the deferrals (plus earnings) should be returned to the affected employees and are simply taxable comp to them subject to income and employment taxes.  The employer match (plus earnings) should be returned to newco/buyer. 

So my view the objective should be to restore all the parties to the positions they intended and would have been in absent this screw up.  If can't because no buyer/newco plan, unwind the transaction.  This is an asset acquisition.  Participation normally ends due to termination of employment.  Payroll screwed up.  (another thought...Was there some type of transition services agreement in place (sometimes the seller might continue providing payroll services so one could easily seem them not changing their systems to reflect these employees were no longer eligible)?)

As always, just throwing darts....

 

 

 

[30Rock]

Thank you Artie. Here are some additional facts - the buyer bought the company's assets correct. However, the buyer then hires all the employees of seller and creates a new subidiary company as the employer of these sold employees, similar name but new EIN. This subsidiary has not yet adopted the buyers 401k plan - by the way both plans are safe harbor. So as of yesterday our plan was to do as you are saying and unwind all the contributions in sellers plan and have new company adopt buyers plan. But today, I learn they (the buyer) have a "TSA" in place with prior company until end of 2026. I am not clear on what the TSA allow for.  I guess the sold employees are still under sellers payroll. So, can the sold employees stay in the sellers 401k and continue to contribute and receive match thru end of 2026, then become participants in buyers plan 1/1/27? Seller can then terminate sellers plan. This would be the ideal outcome. Thoughts? BTW - this is small plan market - approx. $7MM total 401k assets.

[CuseFan]

That may be a possibility if the buyer's new sub adopted the seller's plan as a participating employer, creating a multiple employer plan for that "stump" period, otherwise having them remain in that plan w/o being employees of a participating employer would violate the exclusive benefit rule in my opinion. If the TSA (what does that stand for?) allows for this then maybe that is sufficient for a participating employer agreement, which should have been executed in some form prior to these employee deferrals from the "new" employer.

[Artie M]

I am assuming TSA = transition services agreement.  Either way, first place to start are the transaction documents (including the TSA).  The threshold question really boils down to who is the common-law employer during the TSA period? or like @CuseFan suggests, maybe the buyer/newco adopted the seller plan for a transition period.

I would first look to the APA, as it usually states, in black-and-white, "Effective as of the Closing Date, Buyer shall offer employment and Seller shall terminate employment." If that language exists, it likely overrides any inferences you may be able to draw from the TSA's payroll provisions.  Then you would need a buyer/newco adoption agreement for the seller plan for those employees to participate in the seller plan.

If it doesn’t have those types of provisions, then look at TSA or perhaps an Employee Matters Agreement.  If the TSA, EMA and/or APA expressly provide that seller remains the employer through a transition period, that could be the foundation for continuing participation in seller's safe harbor 401(k) through the end of the TSA period. Those documents—not the payroll mechanics—are likely to determine the answer.

Note that many TSAs (or employee leasing/secondment arrangements) state buyer acquires the business, seller continues to employ workers through the TSA, seller runs payroll, seller issues W-2s, buyer reimburses seller. Employees are "assigned" to buyer operationally but legally remain seller's employees until a later transition date.  All those facts would provide evidence that the seller remains common law employer (the "best case" scenario).  If seller remains the common-law employer through say December 31, 2026, then seller's plan can continue to cover seller's employees til then at which time transition to buyer's plan at end of TSA period--becomes a normal plan transition.  This is by far the cleanest outcome.

If not, back to prior discussion. 

Point of concern in your last post, "the buyer then hires all the employees of seller..." that sounds like common law employer changed—i.e., employees terminated employment with seller on 4/2 and entered into employment with newco on 4/2—then TSA may not overcome that. A TSA can outsource payroll and HR functions, but it generally doesn’t change who the common-law employer is.

[Peter Gulia]

30Rock, imagine some further possibilities:

The workers of the transferred business still are the seller’s employees, are leased to the buyer’s new subsidiary, and expenses allocable to those workers are paid by the buyer’s new subsidiary (or the buyer parent or an affiliate).

Or, the workers of the transferred business are the buyer’s new subsidiary’s employees, and the buyer’s new subsidiary is a participating employer under the seller’s plan, maybe for a transition period (even if that might result in a multiple-employer plan).

Or, another of many ways to allocate economic and accounting consequences between the seller and the buyer.

You might get more information when each plan’s administrator reads all the documents, not only all documents governing the plan it administers but also all documents about the deal between the seller and buyer, including related agreements.

This is not advice to anyone.