bonus paid post-asset sale

I've got a plan (only deferrals and SHNEC money) where the employer is undergoing an asset sale on 1/31/24.  We were all set to terminate the plan on that date pursuant to the business transaction (so they can keep the SH for 2024).  Today they asked if, since it's an asset sale and therefore they will 'retain the company' after 1/31, they can pay out bonuses after 1/31 through payroll (since they'll suddenly have a lot of cash and they are very nice to want to share it with some of their former employees) and how would it affect any plan calculations.  It's not clear yet if they prefer it to be counted or not, but first I want to make sure I've got all the pros and cons right.

I think that as long as the 'payroll date' is in 2024, it will get brought in as plan compensation under the post-severance comp rules (which are included for plan compensation).  The employees are considered terminated on 1/31/24.

Also, since they are retaining their entity (they are an LLC taxed as a partnership), they can effectively say it is open until 12/31/24 and therefore the plan also goes along with that.  I'm fine with terminating the plan effective 12/31/24 - it might even give the partners some additional income if they collect money during 2024.  But if they want to terminate the plan, say, 6/30/24, do they lose the benefit of the safe harbor since at that point, the plan termination is no longer connected to the business transaction? I suppose they could give a 30-day notice at that point - there are no active employees to get it, so they could just stick it in their files.

I'm sure I'm overcomplicating this...

Be mindful of coordinating the dates in the plan termination amendment with the strategy that the partners are considering.  If the amendment sets a short plan year, you will need to factor in prorating annual additions and compensation limits.

Also be mindful to coordinate the plan definition of compensation and net earnings from self-employment with the the plan year end date.

The above items suggest reasons for having the effective date of the plan termination be  as of 12/31/2024.  If so, keep in mind that in order to file a final return Form 5500 (or SF), all of the plan assets must go to zero before the end of the plan year, or there will be an additional filing in 2025.

I expect others on BL will have additional considerations to contribute to the discussion.

Just curious, if it's an asset sale, why is the plan being terminated *prior* to the transaction?  As you point out, the company is on-going, and presumably can delay the termination until a time of their choosing, avoiding the short plan year and proration issues.  That, IMHO gives them maximum flexibility going forward, and they can amend the plan as may be appropriate for those receiving the bonus (either count or not count).

Even for an assets-only purchase, some buyers put in the deal agreement a condition that the seller’s plan is terminated before closing.

While in theory an assets buyer is not responsible for a retirement plan the buyer never assumed, some buyers fear the many ways a buyer can be stuck with a bad situation.

As we remind ourselves to Read The Fabulous Document, sometimes we add RTFD to the deal agreement.

13 minutes ago, Peter Gulia said:

Even for an assets-only purchase, some buyers put in the deal agreement a condition that the seller’s plan is terminated before closing.

While in theory an assets buyer is not responsible for a retirement plan the buyer never assumed, some buyers fear the many ways a buyer can be stuck with a bad situation.

As we remind ourselves to Read The Fabulous Document, sometimes we add RTFD to the deal agreement.

One of my pet peeves....  The buyer acquires a lot of employees who have brand new pickup trucks and bass boats (leakage) - but no retirement savings.  When then "advance in age" they become more and more expensive in many ways (not the least of which is health insurance costs) and IT'S ALL THERE OWN FAULT!

Nothing that is a problem in a retirement plan can't be fixed - the only issue is who pays to fix it and when.  That's what the deal documents should spell out, and why doing business with good recodkeepers/advisors can be invaluable (we will assist in due diligence).

(off my soapbox for now)....

MoJo, thank you for your observations about effects for an acquirer’s business.

About some plan terminations, I long ago suggested that the terminating plan provide that the default final distribution, for a distributee who is (when the final distribution is distributed) eligible for the assets buyer’s plan, is a direct rollover into that new employer’s plan. Does anyone do that?

About perhaps over-cautious lawyering:

A century ago, it was common for one law firm to serve as a business’s counsel for all matters, and in lasting relationships over successive generations. That allowed for wider, sometimes almost holistic, advice.

Now, a firm that works on a business’s acquisitions—even if it regularly does all of them—might have little or no other relationship with the business (and might not keep the relationship over time). If an avoidable risk happens, the firm will be criticized for not having gotten rid of the risk. But if a firm helps a client get good employees and good business productivity, the law firm won’t share in the win for those results.

A few additional thoughts:

• Merging plans is the best way to prevent leakage, and I understand why some advisors recommend it, but the reality is that it's often a major administrative hassle, particularly where the seller's plan has protected benefits that cannot be removed. Then the buyer is stuck with deciding whether to open up those protected benefits to all of its employees, or reserving them for a subset of legacy-seller employees, giving them rights beyond what the buyer's plan allows. In the best case, you're amending the buyer's plan document for most acquisitions. For acquisitive companies that do multiple transactions a year, this gets to be unmanageable over time, particularly on an individually designed plan where you are also chipping away at reliance on the last determination letter every time you amend. 
• Short of merging plans, the only realistic option is terminating the seller's plan. There invariably is leakage. In my experience, acquisitive companies that have an established process for transitioning employees typically do a better job of getting assets rolled over. Several I work with present the rollover process as one package, asking participants only to sign and return the forms to roll over their balance, with the HR team handling the rest. A thoughtful and well-timed communication process can (again, in my experience) increase the rollover rate if it's the path of least resistance. Companies that terminate plans and leave it all up to the participant to request a distribution from the recordkeeper, I think, will lose many more assets in the transition.
• To Peter's question, I have not personally seen that, although I'm sure it happens. In my experience the final default distribution is almost always an IRA in the participant's name. Even if directly rolled over to the buyer's plan as a default, many (most?) plans allow a participant to take a full distribution of his or her rollover account at any time. This adds an extra step, but won't stop a person determined to get the money out. 
• I do think there is a concern among some practitioners, whether warranted or not, that by merging a seller's plan into a buyer's plan the buyer's plan is more at risk for prior non-compliance in the seller's plan. 

I'm so used to extending the termination date out to EOY that I didn't even think of pro rating the limits.  Only 415 gets cut back?

I'll have to have the purchase/sale document reviewed to see what it says, and then also to see if that's favorable for the owners.  If they've already deposited their base deferrals for 2024, they could have already blown the pro rated 415 limit.