New Cash Balance for recently sold company

I have a company that just went through an asset sale that included the former employees.  As of 9/1 there is only the owner left as an employee and he has income coming into the employer for the next few years.  Would there be an issue starting a new CB plan effective 10/1/2023 with a short plan year and only covering the owner?

I feel like I'm missing something, but I'm not sure.

This bothers me as well.  Basically, the Owner waits until he "fires" all his employees and only then starts a new plan for himself.   Timing of plan amendment/adoption issue?  If the sale took place in 2022 that would be different. Just thinking out loud.

Truphao's comments about timing are the potential issue.

I think you clearly have a problem if the service credit or compensation used extends back to any point where he still had employees as that seems to be covered in the examples. I think it's more gray if you draft the Plan such that there is no overlap between the Plan's existence and period where he still had employees. I mean at some point he has to be eligible to establish a plan right? But is it 1 day after he has no employees? the next fiscal year? 12 months after? 5 years? I'm not sure it's fully address, just falls under the catch all "facts and circumstance"

For further you can start at...

§ 1.401(a)(4)-5 Plan amendments and plan terminations.

Yeah, i looked through 401(a)(4) and it troubles me, but at the same time, would this prevent him from ever having a plan?  No prior comp will be considered, only W2 comp after the establishment of the plan.  No prior service either.

The facts and circumstances can show that it was not economically feasible to have a plan prior to the sale, whereas now it is.  It doesn't feel great, but I'm having a hard time saying no.

I would be OK starting the Plan in 2024 but no so wrt 2023.

Before sorting out whether a creation of a new pension plan might have a minimum participation, coverage, or nondiscrimination issue:

Consider suggesting that the former business owner seek, if he hasn’t already done so, his lawyers’, accountants’, tax advisers’, investment managers’, and financial-planning advisers’ advice about whether creating a pension plan fits his interests and the considered integration of the whole of his planning.

What to do after an operating business’s sale of its assets often calls for full-picture advice, involving everyone who might advise or handle useful information.

It may be worth asking ERISA counsel before proceeding, but personally I would be comfortable with it assuming you accrue the benefits based on comp and service after the employees were gone. If you can have a conversation with the plan sponsor and explain the potential risk and they are willing to take on that risk then I would be comfortable administering it.

Certainly ERISA counsel input would be warranted. As others noted, any prior service component would create discrimination issues, in my opinion, and I think a 2023 short plan year may also be pushing the envelope. A totally prospective plan beginning 2024 would appear safer to me. This wasn't a "I fired everyone so I could start a plan" situation, there was a business transaction and such events regularly give rise to changes in retirement programs.

On 9/21/2023 at 1:42 PM, Hojo said:

he has income coming into the employer for the next few years

You also need to consider the nature of the income. Earnout payments from the sale should be capital gain, not compensation. Consulting or receivables would be a different story. Obviously, there needs to be a W-2 or K-1 to the individual for 415 purposes.