Safe Harbor Mid-Year MERGER

If a Safe Harbor plan (Plan B) merges into a non-safe harbor plan (Plan A) mid-year due to an acquisition, does Plan B receive the benefit of a "terminating" plan under the safe harbor regs from the first day of the plan year through the merger? Then as of the merger date, the Plan A tests the plan with the full year information for the employees of Plan A and then from the date of the merger through the end of the plan year for employees of Plan B?

I know there is no guidance on this, but how are others handling? 

Why are the plans merging? Was it due to a merger or acquisition involving the plan sponsors? If so rely on 410(b)(6)(C) and test the plans separately until the end of the transition period. Then merge them on the first day of the plan year beginning after the transition period.

Yes, acquisition of employer of Plan B by employer of Plan A. Employer A wants to stop the Safe harbor contribution upon the acquisition date as it is too expensive. Too late to terminate the SH plan as acquisition already occurred... 

45 minutes ago, JustMe said:

Yes, acquisition of employer of Plan B by employer of Plan A. Employer A wants to stop the Safe harbor contribution upon the acquisition date as it is too expensive. Too late to terminate the SH plan as acquisition already occurred... 

It's so tiring telling people that we could have provided options if they had only consulted us prior to the transaction.

The M&A attorneys should be sued for malpractice.

19 hours ago, Bill Presson said:

It's so tiring telling people that we could have provided options if they had only consulted us prior to the transaction.

The M&A attorneys should be sued for malpractice.

I wish I could "like" this twice.  I refuse to make the client's problem my problem just because their team of attorneys didn't do their due diligence. 

13 minutes ago, RatherBeGolfing said:

I wish I could "like" this twice.

Amen.  I don't always click the "like" button but this was a YES, THAT comment.  I'm sure the attorneys got paid well.

So are you saying there is no way to handle this post-transaction? Does the safe harbor plan lose its safe harbor status and has to be tested for the full year with the non-safe harbor plan, or can the merger, in essence, terminate the safe harbor plan and then test the remainder of the year data with the full year non-safe harbor plan?

Was the acquisition a stock sale or an asset sale?

Stock sale.

On ‎7‎/‎30‎/‎2020 at 11:54 AM, JustMe said:

Yes, acquisition of employer of Plan B by employer of Plan A. Employer A wants to stop the Safe harbor contribution upon the acquisition date as it is too expensive. Too late to terminate the SH plan as acquisition already occurred... 

Bill, just to make sure everyone understands , and to provide the cite to applicable regulations, you're saying that the SH plan could have been  terminated (since it was a stock acquisition) before close and then it would have been treated as safe harbor (no ADP or ACP testing) for its short year through the termination under Treas. reg. 1.401(k)-3(e)(4)(ii), had it actually terminated  an not been merged? The acquirer's plan could have added the target's employees immediately, which would have blown 410(b)(6)(C), but would probably have work out ok?

I would greatly appreciate some direction as I am sure this will be a relevant topic with businesses changing hands due to COVID over the upcoming months and years!

On ‎8‎/‎1‎/‎2020 at 7:41 PM, Luke Bailey said:

Bill, just to make sure everyone understands , and to provide the cite to applicable regulations, you're saying that the SH plan could have been  terminated (since it was a stock acquisition) before close and then it would have been treated as safe harbor (no ADP or ACP testing) for its short year through the termination under Treas. reg. 1.401(k)-3(e)(4)(ii), had it actually terminated  an not been merged? The acquirer's plan could have added the target's employees immediately, which would have blown 410(b)(6)(C), but would probably have work out ok?

I agree with this description of what the seller could have done prior to the sale and that more options would have been available prior to the sale.  But, the transaction the OP describes has already happened.

First of all, the IRS has never issued guidance dealing with mergers of safe harbor plans.  1.401(k)-3(i) was originally reserved for it.  But, it just says Reserved.  For those who think 1.401(k)-3(e)(4)(ii) doesn't apply after the transaction has taken place, what do you see that indicates this is only available before the transaction?

With no guidance available, our only choice is to use a reasonable, good faith interpretation of the code and regs.  Let's change the OP situation a little.  Suppose after A closes on the stock purchase of B, that A terminates Plan B shortly thereafter.  Plan B will have a short final year due to the plan termination and it looks to me the termination was in connection with a transaction described in 410(b)(6)(C). So, under 1.401(k)-3(e)(4), it can be safe harbor for the final year.  But, wait.  Under 1.401(k)-1(d)(4), Plan A is considered to be an alternative defined contribution plan of the "employer" as of the date Plan B is terminated. That means the plan B termination is not a distributable event.  So, what happens to the balances of the active participants in Plan B?   While the regs don't directly address it, if Plan B is going away and you can't distribute the balances of the active participants, I don't see any option other than merging their balances into Plan A.  I don't see anything in 1.401(k)-3(e)(4)(ii) that says it doesn't apply if any of the balances can't be distributed due to the plan termination. So, I don't see that it is affected by the balances going to Plan A after the plan termination.

The big question is do you get the same result in the very similar situation of Plan B being merged into Plan A after the stock purchase?  With no guidance on merging SH plans, it's a judgment call.

4 hours ago, Kevin C said:

I agree with this description of what the seller could have done prior to the sale and that more options would have been available prior to the sale.  But, the transaction the OP describes has already happened.

First of all, the IRS has never issued guidance dealing with mergers of safe harbor plans.  1.401(k)-3(i) was originally reserved for it.  But, it just says Reserved.  For those who think 1.401(k)-3(e)(4)(ii) doesn't apply after the transaction has taken place, what do you see that indicates this is only available before the transaction?

With no guidance available, our only choice is to use a reasonable, good faith interpretation of the code and regs.  Let's change the OP situation a little.  Suppose after A closes on the stock purchase of B, that A terminates Plan B shortly thereafter.  Plan B will have a short final year due to the plan termination and it looks to me the termination was in connection with a transaction described in 410(b)(6)(C). So, under 1.401(k)-3(e)(4), it can be safe harbor for the final year.  But, wait.  Under 1.401(k)-1(d)(4), Plan A is considered to be an alternative defined contribution plan of the "employer" as of the date Plan B is terminated. That means the plan B termination is not a distributable event.  So, what happens to the balances of the active participants in Plan B?   While the regs don't directly address it, if Plan B is going away and you can't distribute the balances of the active participants, I don't see any option other than merging their balances into Plan A.  I don't see anything in 1.401(k)-3(e)(4)(ii) that says it doesn't apply if any of the balances can't be distributed due to the plan termination. So, I don't see that it is affected by the balances going to Plan A after the plan termination.

The big question is do you get the same result in the very similar situation of Plan B being merged into Plan A after the stock purchase?  With no guidance on merging SH plans, it's a judgment call.

That's the way I view it as well. Thanks, Bill.

16 hours ago, Luke Bailey said:

That's the way I view it as well. Thanks, Bill.

Sorry, just now seeing that you asked me. But @Kevin C is the one that answered.

OK, thanks, Bill. And thanks, Kevin C.

That's how I see it as well! Thank you all for the group effort!