Safe Harbor 401k vs Asset Sale

Company X sponsors a calendar year-end safe harbor 401k. As of July 31, Company Z is buying Company X. More specifically, Z is buying the assets of X; it is an asset sale. X's employees will then go to work for Z.

If X terminates its 401k as of July 31, does it still get safe harbor protection for the final, short plan year? Normally, if safe harbor is discontinued during the year, then no safe harbor protection is given for that year. But if a company is purchased, then an exception is granted. Does this exception extend to an asset sale?

I think the safe harbor is automatic because it's an asset sale; which means that there is a termination of employment from Company X on the date of sale for each employee acquired in the transaction.

I think the same would apply if it were an equity sale and Company Z decided not to take over the plan of Company X during the acquisition.  In this case, those employees are treated as if they have severed employment (at least for distribution purposes).  

Good Luck!

The exception you are referring to is for a mid-year termination in connection with a 410(b)(6)(C) transaction. An asset sale is a 410(b)(6)(C) transaction. Probably not an issue, but 1.401(k)-3(e)(4) also requires that the safe harbor provisions are in effect through the date of the plan termination.

Quote

1.410(b)-2(f) Certain acquisitions or dispositions. Section 410(b)(6)(C) (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)(C) and this paragraph (f), 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.