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BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Moving Out of a Multiple Employer 401(k) Plan

(Posted April 13, 2017)

Question 341: An employer wants to move out of the 401(k) plan operated by their current PEO and establish a 401(k) plan with more flexibility in design. The plan with the PEO (which is co-sponsored by the employer) is not a safe harbor plan. Would the new plan be a 'successor' plan? Could it be a safe harbor plan?


This is one of the many situations where the pension community can fondly wish that Treas. Reg. 1.401(k)-5, entitled "Special Rules For Mergers, Acquisitions And Similar Events," said something other than "[Reserved]." After all, it's been 13 years since the Treasury issued the final 401(k) regulations. Isn't that reservation a little stale by now?

We are left to do the best we can with "unspecial" rules that do not consider the peculiarities of such transactions. Let's examine this issue a piece at a time:

  1. Is the new plan a different plan than the PEO plan, or merely a continuation? It is truly a new plan. There is a new "pot of money" under a new document and a new trust, filing a separate 5500 (which should have the "first year" box checked).
  2. Was the PEO plan maintained by the employer? Yes. The employer may not have had the power to do anything under the plan other than make contributions and terminate participate, but it signed on as a sponsor, and that is enough to maintain a plan.
  3. Is the new plan a successor plan under the 401(k) plan rules? Yes. Reg. 1.401(k)-2(c)(2)(iii) defines a plan as a successor plan if "50% or more of the eligible employees for the first plan year were eligible employees under a qualified cash or deferred arrangement maintained by the employer in the prior year." That is the definition that applies for the safe harbor rules. See Reg. 1.401(k)-3(e)(2).
  4. Can the employer set up a safe harbor 401(k) plan immediately upon withdrawal? Yes, but that plan will need to have a 12-month plan year. The rule that allows a short initial plan year does not apply because the plan is a successor plan.
  5. Suppose the employer is willing to have an initial 12-month plan year, starting May 1. Can the employer convert to a calendar year plan thereafter, perhaps by having a short year from May 1, 2018 to December 31, 2018? Yes. Reg. 1.401(k)-3(e)(3) specifically allows the plan to retain safe harbor status in this situation, although both the prior year, ending April 30, 2018, and the following year, beginning January 1, 2019, would need to be safe harbor.
  6. Would the employer be able to carry over the deferral elections from the prior plan as an automatic enrollment device? It would not qualify as an ACA under ERISA or a EACA or a QACA under the Code because the deferrals would not be "uniform." Otherwise, I cannot see anything that would prevent it, assuming the plan document is sufficiently flexible to permit it.
  7. Would the employer be able to give the safe harbor notice now, less than thirty days before a May 1 effective date? Yes. Because this is a new plan, the notice is "deemed reasonable" if given any time before the May 1 entry date. Reg. 1.401(k)-3(d)(ii). The fact that this is a successor plan does not affect this rule.

Chapter 22 of my book, Who's the Employer, defines plans. Chapter 18 discusses multiple employer plans. For information about the upcoming 7th edition, click here.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1999-2017 S. Derrin Watson
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