Dougsbpc Posted July 21 Posted July 21 Many of us have probably run into this scenario: We administer a small defined benefit plan for an attorney. He has no employees and gets most (if not all of his paralegal work) done by a firm that provides contractors. The plan has been in place for 7 years and is currently frozen. The idea was that it will soon be terminated and distributed. The attorney is now selling his law practice through a stock sale. Each year the buyer will receive 20% of the corporation's stock until 100% is owned after the fifth year. The seller wants to unfreeze the plan and make substantial contributions for one year of about $300,000 then terminate the plan. Question: when this sale is taking place, does an affiliated service group exist? And if so, I would think the buyer and his 3 employees and the seller (only him) would need to be aggregated for all testing in the now unfrozen defined benefit plan. It turns out the seller does not want to cover anyone but him. If an affiliated service group exists I would think we would have 5 to consider. Just for 401(a)26 he would then need to cover (5 x 40% = 2). Just out of curiosity, would an affiliated service group exist if this were an asset sale (for example a sale price of $1.5M with the buyer paying 20% of $1.5M each year for 5 years)? Thanks.
CuseFan Posted July 22 Posted July 22 Yes, after the sale I would say there is an ASG. I suggest unfreezing the DBP before the transaction (a MUST) and using the transition rule under 410(b)(6)(C), which applies to ASGs and also gives 401(a)(26) relief for the same period. 410(b)(6)(C) (C)Special rules for certain dispositions or acquisitions (i)In generalIf a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if— (I) such requirements were met immediately before each such change, and (II) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a group) or such plan meets such other requirements as the Secretary may prescribe by regulation. 1.401(a)(26)-5 (5) Certain acquisitions or dispositions — (i) General rule. Rules similar to the rules prescribed under section 410(b)(6)(C) apply under section 401(a)(26). Pursuant to these rules, the requirements of section 401(a)(26) are treated as satisfied for certain plans of an employer involved in an acquisition or disposition (transaction) for the transition period. The transition period begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction. (ii) Special rule for transactions that occur in the plan year prior to the first plan year to which section 401(a)(26) applies. Where there has been a transaction described in section 410(b)(6)(C) in the plan year prior to the first plan year in which section 401(a)(26) applies to a plan, the plan satisfies section 401(a)(26) for the transition period if the plan benefited 50 employees or 40 percent of the employees of the employer immediately prior to the transaction. (iii) Definition of “acquisition” and “disposition.” For purposes of this paragraph (b)(5), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business. Jakyasar 1 Kenneth M. Prell, CEBS, ERPA Vice President, BPAS Actuarial & Pension Services kprell@bpas.com
Dougsbpc Posted July 22 Author Posted July 22 Thank you CauseFan What if this had been an asset sale? Other than a management group, I believe there must be some common ownership in each entity for an ASG to exist. If ABC company is purchasing the assets of DEF company, does purchasing the assets equate to having an ownership interest in DEF company?
Artie M Posted July 22 Posted July 22 Ownership = ownership interest. There is attribution but attribution still involves ownership interests. Note a B org only requires HCES owning a 10% interest in the FSO (A org). Just my thoughts so DO NOT take my ramblings as advice.
CuseFan Posted July 23 Posted July 23 Asset sale - practice B buys assets of practice A, owner A now becomes employee of practice B, plan A stays behind - no ownership overlap so no ASG. But on what basis/income does owner A make contribution to plan A? Kenneth M. Prell, CEBS, ERPA Vice President, BPAS Actuarial & Pension Services kprell@bpas.com
Dougsbpc Posted July 24 Author Posted July 24 Information update: the asset purchase will take place over 10 years (approx. $170k per year). I think above I mentioned that the defined benefit plan will be made active for one year. It will actually be active for about 5 years then terminate and distribute. A's corporation still exists. The income from the sale to practice B is paid to practice A's corporation. This amount per year will represent about 90% of practice A's revenue each year for the next 10 years. What would happen if the $170k per year is paid directly to the 100% shareholder of Practice A each year instead of the practice A corporation? Thanks.
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