401k Plan Termination - post termination date contributions?

Our company is being acquired and the acquiring company has informed us that they wish to terminate our existing 401k plan.  Our plan is a Safe Harbor plan (100% match on first 3%. 50% on the next 2%) that incorporates a year end true-up.  The acquiring company wants to move fast and wishes to terminate the plan ASAP.

I have limited experience with 401k plan closures, so I have a few questions:

-  If for instance, the plan was set to terminate on March 15th and we have a pay date on March 15th, the regular 401k deferrals and matching contributions would not be deposited into the 401k plan until March 18/19, after the plan termination date. Does this present a problem?

-  Our plan also has a true-up provision, I'm not exactly sure how soon we would be able to calculate and deposit the 2024 true-up contribution, but it would be weeks, maybe months after the plan termination date...is this OK?

- IRS determination letters.  I know this is optional, but curious to know if most plans seek the determination letter when closing a plan.  For those that wait for the determination letter, how long does that typically take?

Any other thoughts or things that I should be concerned about with the closing of the 401k plan?

TIA

Contributions must end after the termination date, but they can be deposited a day or so later. Testing has to be done before assets are out of the plan. Generally, you have one year to get assets our of the plan from the plan termination date. Here is a good link from the IRS: https://www.irs.gov/retirement-plans/terminating-a-retirement-plan

We should be clear:

• make sure you are not confusing "buying the company" vs. "buying the company's assets".  (I mean no disrespect; there are dozens of examples of people saying, or understanding, this incorrectly.)  In the latter case, the plan would still exist with the same sponsoring organization.
• the acquirer has NO authority to terminate (or amend) the plan prior to the acquisition date, no authority (anytime) if the transaction is "buying assets".

David, thanks for chiming in.  Just to be clear, the 401k closure is to happen in conjunction with the close date of the acquistion....they are not instructing us to close the plan down before acquisition, just letting us know that they intend to close the plan immediately once they are in control.

@MD-Benefits Guy you are correct to ask questions because the when and how the acquisition is done can have a significant impact on your current plan's participants.

First and foremost, pay attention to @david rigby's comment about whether the buyer will acquire all of the stock of your company (the seller) or the buyer will acquire all of the assets of your company (the seller).  If this is a stock transaction, then upon closing the buyer in control of the plan.  If this is an asset transaction, then upon closing the buyer is not in control of the plan and the seller continues to exist after closing and the seller can decide the fate of the plan. 

You do not say if the buyer has an existing 401(k) plan or, if not, intends to adopt a 401(k) plan.  If yes, there are rules about whether the buyer's 401(k) plan is considered a successor plan to a seller's plan that is terminated after closing, and these rules can be particularly onerous after a stock transaction.  The more common scenario for handling an acquired seller's plan is for the seller's plan to be merged into the buyer's plan.  A plan merger is different from a plan termination.

If the buyer expects to have an existing 401(k) plan operating alongside the seller's plan, each plan's document should be carefully reviewed to address potential unintended consequences.  Each plan's provisions regarding eligibility, excludable employees, plan compensation, contributions (including answering your question about true-ups), vesting, and the safe harbor features should state clearly what applies to all or each subgroup of employees.  This review definitely should be done before closing a stock transaction.

Another note to keep in mind is that plans are terminated by adopting an amendment to terminate the plan.  In addition to setting the termination date and the plan year end date, the termination amendment can be used to address the questions you raised in your original post.

Mergers and acquisitions, handled properly, can go smoothly with few surprises.  Handled improperly, they can lead to bad feelings and costly compliance issues.  Hopefully, both the buyer and seller in this transaction have experience with what needs to be done with existing plans of both the buyer and seller.

On 2/29/2024 at 9:47 AM, david rigby said:

We should be clear:

• make sure you are not confusing "buying the company" vs. "buying the company's assets".  (I mean no disrespect; there are dozens of examples of people saying, or understanding, this incorrectly.)  In the latter case, the plan would still exist with the same sponsoring organization.
• the acquirer has NO authority to terminate (or amend) the plan prior to the acquisition date, no authority if the transaction is "buying assets".

22 hours ago, Paul I said:

@MD-Benefits Guy you are correct to ask questions because the when and how the acquisition is done can have a significant impact on your current plan's participants.

First and foremost, pay attention to @david rigby's comment about whether the buyer will acquire all of the stock of your company (the seller) or the buyer will acquire all of the assets of your company (the seller).  If this is a stock transaction, then upon closing the buyer in control of the plan.  If this is an asset transaction, then upon closing the buyer is not in control of the plan and the seller continues to exist after closing and the seller can decide the fate of the plan. 

You do not say if the buyer has an existing 401(k) plan or, if not, intends to adopt a 401(k) plan.  If yes, there are rules about whether the buyer's 401(k) plan is considered a successor plan to a seller's plan that is terminated after closing, and these rules can be particularly onerous after a stock transaction.  The more common scenario for handling an acquired seller's plan is for the seller's plan to be merged into the buyer's plan.  A plan merger is different from a plan termination.

If the buyer expects to have an existing 401(k) plan operating alongside the seller's plan, each plan's document should be carefully reviewed to address potential unintended consequences.  Each plan's provisions regarding eligibility, excludable employees, plan compensation, contributions (including answering your question about true-ups), vesting, and the safe harbor features should state clearly what applies to all or each subgroup of employees.  This review definitely should be done before closing a stock transaction.

Another note to keep in mind is that plans are terminated by adopting an amendment to terminate the plan.  In addition to setting the termination date and the plan year end date, the termination amendment can be used to address the questions you raised in your original post.

Mergers and acquisitions, handled properly, can go smoothly with few surprises.  Handled improperly, they can lead to bad feelings and costly compliance issues.  Hopefully, both the buyer and seller in this transaction have experience with what needs to be done with existing plans of both the buyer and seller.

Some more info on the situation.....

My company and the acquiring company are publicly traded.  At the close of the deal, our ticker symbol will no longer exist.  The acquiring company does have a 401k plan, but they have made it known through the terms of the merger/acquisition agreement, that once the deal closes, they will terminate our 401k plan immediately.  Our legal team is drafting the plan amendment and whatever documents are necessary to close the plan.

My concern was primarily regarding the timing of the last contributions into the plan - at one point I was told that no additional contributions could take place after the termination date.  But now I am being told that contributions into the plan after the termination date are permissible, provided that the contributions are being made for activity that occurred prior to the termination date.

Thank you everyone for your input, 401k closures are not something I do everyday.

It sounds like this is a stock acquisition and the plan will terminate after closing.  The one big thing happens under these circumstances that messes things up is when employees of the seller who do not have a distributable event from the seller's plan and who continue to be employed by the buyer are allowed to take a distribution from the seller's plan when it terminates.

Here's hoping 401(k) closures is something the legal team does have the knowledge and experience to do.

Are there advantages to having the plan termination effective one day before the transaction is closed?  It's worth considering.