M&A Question

We have a client "Company A" who sponsors a 401(k) plan and recently purchased another business "Company B" via stock-sale late in 2023. Company B also sponsors a plan and that plan was not terminated prior to the close of the sale. The plans can't be merged mid-year, so we were planning on merging the two plans for 2025 and relying on the transition relief period through 12/31/2024.

We were just told that Company A signed on as Plan Sponsor of Company B's 401(k) plan, has moved all of Company B's employees onto Company A's payroll, and still has those same employees participating (deferring and receiving match) in Company B's plan.

What do we do here? My first thought would be that the employees who were moved to Company A's payroll would also move to Company A's 401(k) plan, but it's confused by the fact that Company A is now the Plan Sponsor on both plans. Did they knock themselves out of transition relief? If so, do they need to do a corrective amendment for the "carveout" of employees still participating in Company B's plan and now they need to pass coverage? 

Gotta love being the last to know with M&A

KJJ-TPA, this might be amenable to research or a call to IRS, but I'm not sure there's a clear answer. It would seem to me that the 410(b)(6)(C) transition rule probably was not lost because the coverage of neither plan was changed in substance. There was just a change in the sponsor and in the person paying payroll. The B plan still covers the folks who work B jobs, and same for the A plan. The 410(b)(6)(C) rule specifically disregards coverage changes "by reason of the change in members of the group."

The above is an example of why it was so nice in the old days to be able to get a determination letter on a plan amendment.

I think the answer lies in the terms of each of the plans.  I'll bet that the "A" plan covers all employees of "A" and if so, you have a problem.  Since they are a controlled group, you can divvy the participants up to participate in either plan as you wish (we see some clients do that to avoid the audit requirement), but the plans have to have the right provisions concerning who is eligible for each....

"We would suggest you consult with ERISA counsel"

MoJo is correct that the terms of the plan could cause a problem, but my guess is that the lawyers may have done the right thing here and made sure that Plan A's coverage was not extended to B's historical employees, given that Company A adopted Plan B and based on your OP, KJJ-TPA, there does not appear to be an immediate intent to merge Plan B into Plan A.

Thinking back on this after I posted yesterday, I think the case that the 410(b)(6)(C) protection was not lost (assuming that MoJo's suspicion that Plan A's coverage was extended, intentionally or unintentionally through boilerplate tucked away in the Plan A plan document is incorrect) is even stronger than I stated yesterday. The 410(b)(6)(C) regs are very short and incomplete, but they do state clearly that 410(b)(6)(C) protection should not depend on the form of the transaction (i.e., stock sale, asset sale, or merger). Assuming that Plan B's coverage has remained the historical Company B employees, and same for Plan A, then the effect of A's adopting Plan B and putting the B employees on its payroll (but having them continue to defer and otherwise be covered by Plan B) is the same effect you would have if the transaction had been an asset acquisition or merger.