Safe Harbor Match & Safe Harbor Nonelective During Transition Period

I believe this is permissible, but am hoping someone with more testing experience can confirm. 

Say Company A acquires the assets of Company B. Company B employees will become Company A employees at closing. Company A has a safe harbor match 401(k) plan, and Company B has a safe harbor nonelective 401(k) plan. If Company A assumes sponsorship of Company B's plan, can both plans be maintained separately (for their respective pre-acquisition employee populations) during the 410 transition period without any adverse testing consequences? 

Thanks in advance.

5 hours ago, EBECatty said:

I believe this is permissible, but am hoping someone with more testing experience can confirm. 

Say Company A acquires the assets of Company B. Company B employees will become Company A employees at closing. Company A has a safe harbor match 401(k) plan, and Company B has a safe harbor nonelective 401(k) plan. If Company A assumes sponsorship of Company B's plan, can both plans be maintained separately (for their respective pre-acquisition employee populations) during the 410 transition period without any adverse testing consequences? 

Thanks in advance.

I am pretty sure the answer is no.  The acquisition was one of assets.  There is no controlled group.  There is only one company.  The employees are no longer employees of B.  There is no change in group membership of a controlled group.  From Derrin's book:

Q 11:1 Is there a grace period for coverage when there is a change in a controlled group?   

Yes. The Code sets up a grace period, called the “coverage transition rule” of more than one year during which a plan automatically passes Code §410(b) and Code §401(a)(26), the minimum participation and coverage requirements. [For more on the coverage and participation requirements, see Chapter 23.] To take advantage of this transition rule, all of the following conditions must be met:

1. The plan’s sponsor must be involved in a change in group membership. [Q 11:2]

2. The plan must have existed prior to the change.

3. The plan must have satisfied the minimum participation and coverage requirements before the change (without regard to the transition rule).

4. Coverage and benefits under the plan must not change significantly during the grace period, other than by reason of the change.

Q 11:2 What is a change in group membership that qualifies for the free pass of the participation and coverage requirements?   

The Code speaks of an entity becoming, or ceasing to be, a member of a group of employers aggregated under the Code. This could be:

• A controlled group of corporations under Code §414(b) [Chapter 8],

• A group of trades or businesses under common control under Code §414(c) [Chapter 12],

• An affiliated service group under Code §414(m) [Chapter 13], or

• Another set of businesses required to be aggregated under the nonexistent Code §414(o) regulations [Chapter 15 ; Code §410(b)(6)(C)].

The plan sponsor need not be the entity that joined or left the group.

If you have access to the EOB, the 2018 version (the 2019 is in the other room, and I'm too lazy to go get it) has a discussion of this issue starting on page 15.788.

I'll try to pull those. Thanks.

If they can't use the transition period, and assuming they can accurately categorize the employee populations (e.g., "legacy seller") and both plans pass 410(b) independently, it's okay to have one plan use a safe harbor match and one plan use a safe harbor nonelective, correct?

Larry, I agree that that is a direct reading of the Code, but Treas. reg. 1.410(b)-2(f) seems intend to extend the relief to asset purchases.

Thanks Luke. My understanding also is that you get the transition period following an asset purchase. 

Either way, that just solves 410(b). So, assuming you either (a) have the 410(b) transition, or (b) pass 410(b) independently with respect to each plan, I guess my fundamental question is can one employer simultaneously sponsor a SH match plan and SH nonelective plan?

I don't see any reason why not.

16 hours ago, Mike Preston said:

I don't see any reason why not.

My understanding as well, EBECatty.

Thank you both!

21 hours ago, Luke Bailey said:

Larry, I agree that that is a direct reading of the Code, but Treas. reg. 1.410(b)-2(f) seems intend to extend the relief to asset purchases.

Luke,  thanks for that reference. Here is the language for those that care:

(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.

The inclusion of "acquisition" does seem to cover the situation and does seem to give the transition period.  

17 hours ago, EBECatty said:

Thanks Luke. My understanding also is that you get the transition period following an asset purchase. 

Either way, that just solves 410(b). So, assuming you either (a) have the 410(b) transition, or (b) pass 410(b) independently with respect to each plan, I guess my fundamental question is can one employer simultaneously sponsor a SH match plan and SH nonelective plan?

No reason at all why they can't.

There's a key problem to this, and that is whether the actions taken to eliminate the acquired employees from the existing plan and to adopt the plan of the seller represent amendments that terminate the 410(b)(6)(C) transition period.  To make a judgment on what you can and can't do, I'd need to see how the documentation was handled.  The fact that the plans are safe harbor plans and amendments to narrow the coverage of those plans mid-year are generally prohibited adds another element to the problem.

All in all, get a lawyer involved, kids ... this is not for casual answers.

6 minutes ago, Ilene Ferenczy said:

There's a key problem to this, and that is whether the actions taken to eliminate the acquired employees from the existing plan and to adopt the plan of the seller represent amendments that terminate the 410(b)(6)(C) transition period.  To make a judgment on what you can and can't do, I'd need to see how the documentation was handled.  The fact that the plans are safe harbor plans and amendments to narrow the coverage of those plans mid-year are generally prohibited adds another element to the problem.

 

All in all, get a lawyer involved, kids ... this is not for casual answers.

And that is exactly what I would require in this situation; I might try to get the answer in my own mind, but I want the proverbial "good ERISA attorney" to put it in writing for the client!  BTW, Ilene fits that description!

Thanks. Appreciate the further thoughts. I'm not committed one way or the other, but:

On the first point, this concern would be moot if both plans separately satisfied 410(b) without having to use the transition rule. Even if you needed the transition rule, I think you could take the position that the proposed change to buyer's plan (only "legacy" employees of buyer are eligible; no other coverage changes) and seller's plan (only "legacy" employees of seller are eligible; no other coverage changes) arguably do not "significantly change" the coverage of either plan. The same people are covered by the same plan with the same terms both before and after the sale. 

On the second, I think you could also take a similar position that, under Section III.D.2 of Notice 2016-16, the proposed amendments would not "reduce the number or otherwise narrow the group of employees eligible to receive safe harbor contributions." Every employee is getting the same safe harbor contribution both before and after closing.

Acknowledging there's some risk of interpretation, but I think both those positions could be taken in good faith.