If SH is removed mid-year due to acquisition, do SH provisions apply for that year and you don't need to worry about ADP testing?

I have an inquiry to make that I hope would be fairly simple to answer, which I know is normally not that case -

I never knew this but then the year before last in a conference call a client was stopping SH mid-year because they were acquired by another company. As a result, I was advised that the SH provisions continue to apply, even if the SH is removed mid-year, if it results from an acquisition. Again, I was never aware of this so I would appreciate it if someone could confirm whether it is in fact true if SH is removed mid-year because a company is acquired by another company, then the SH provisions DO apply for that year and you don't need to worry about ADP testing.

Section 1.401(k)-3(e)(4)(ii)

A short plan year due to a 410(b)(6)(C) transaction still maintains safe harbor status.

Thank you! This really helped clear things up for me!

Not sure you two are saying the same things.

You may be right. After reviewing the OP again, I was assuming the following (should not have assumed): seller sponsored a plan, attorney's recommended the plan be terminated the day before closing, board resolution was drafted and signed timely to terminate the plan due to acquisition. Also assuming the plan was terminated, not just SH removed. 

If that is not the fact pattern, then my answer will need to be revised. 

Alright, so the Plan is in fact terminating; however, termination occurred after the asset sale. I’ve been researching this, because everything I’ve found (including in the ERISA Outline Book) just talks about terminating the plan due to a 410(b)(6)(c) transaction – nothing about having to terminate it BEFORE the transaction. Then I went to 1.401(k)-3(e)(4), which the ERISA Outline Book indicates that this is from, and it reads as follows:

________________

(4) Final plan year. A plan that terminates during a plan year will not fail to satisfy the requirements of paragraph (e)(1) of this section merely because the final plan year is less than 12 months, provided that the plan satisfies the requirement of this section through the date of termination and either -

(i) The plan would satisfy the requirements of paragraph (g) of this section, treating the termination of the plan as a reduction or suspension of safe harbor contributions, other than the requirements of paragraph (g)(1)(i)(A) or (g)(1)(ii)(A) of this section (relating to the employer's financial condition and information included in the initial notice for the plan year) and paragraph (g)(1)(i)(D) or (g)(1)(ii)(D) of this section (requiring that employees have a reasonable opportunity to change their cash or deferred elections and, if applicable, employee contribution elections); or

(ii) The plan termination is in connection with a transaction described in section 410(b)(6)(C) or the employer incurs a substantial business hardship comparable to a substantial business hardship described in section 412(c).

______________

So I’m not sure – reading this, I don’t see anything about WHEN the plan is terminated. I’m just reading this as the plan is terminated as a RESULT of this transaction. My thought is that what if someone thinks this is going to happen, and then terminates their plan lets say on March 30th, assuming the sale is to be March 31st. Then let’s say the transaction falls through – that happens quite frequently. What happens then? They have terminated a SH plan with the assumption that this transaction was GOING to happen, which means it could have been SH. But then the transaction DOESN’T happen – so basically, they would lose SH status and would have terminated the plan when they didn’t need to. It just seems with ANY termination prior to an actual transaction, you never know whether the transaction is going to go through. So again, given my thinking and that I don’t see anything in the regulation that specifically says the plan must be terminated BEFORE the transaction, I’m thinking it’s still good if the termination occurs after the transaction date. It’s only at that point that you know that it is actually happening/happened.

You can make the termination contingent on the transaction.  

As Mike notes above, it's fairly common to have the termination resolution state that the plan will be terminated the day before closing, contingent on the transaction actually closing. I have never run into problems with this approach. 

In an asset sale, you can also wait to terminate the plan until after closing, assuming the purchase agreement does not require otherwise. (Stock sales have different implications, and generally the plan should be terminated before closing.) There is no requirement in the safe harbor regulations that the plan be terminated before a 410(b)(6)(C) transaction, just "in connection with" one.

Alright, that's actually good news. I appreciate the feedback!