SH Plan Termination

If a SH plan terminates with an effective date of 8/31, the termination is due to the company being acquired.  The final paycheck is not due to be paid until 9/9.  Can the plan continue to accept pretax and SH match contributions from the 9/9 paycheck?

IMO the answer is no...but I don't think anyone, including the IRS, would care.  If they wanted to accept those contributions they should have made the term date 9/9.  And still could change the term date.

I think your plan document could foreclose it, but generally I'm of the opinion that it's fine as long as the contribution is made with respect to compensation earned before the date of termination. Otherwise, you would be required to calculate all contributions (including final payroll, match, SH nonelective, etc.) and actually deposit them before the proposed termination date. Unless the document explicitly says otherwise, I don't think you would be that constrained. 

This is the relevant language from the standard FIS Relius termination amendment:

Cessation of contributions. No employees shall enter the Plan after the Effective Date of Plan Termination, and there will be no contributions for periods after such date. Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation paid after such Effective Date.

I don't think depositing a payroll deduction (due solely to paycheck timing) for compensation earned prior to the termination date is a "contribution for periods after such date."

2 hours ago, EBECatty said:

This is the relevant language from the standard FIS Relius termination amendment:

Cessation of contributions. No employees shall enter the Plan after the Effective Date of Plan Termination, and there will be no contributions for periods after such date. Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation paid after such Effective Date.

 

I read that as prohibiting deferrals from compensation paid after the Effective Date of Plan Termination. The standard termination amendment language hasn't been approved by the IRS, so it can be changed.  A revised last sentence would make it clear.  "Furthermore, in determining any contributions prior to the Effective Date of Plan Termination, the Plan will not take into account Compensation for services rendered paid  after such Effective Date." 

If the transaction will occur between 8/31 and 9/9, changing the effective date to after the transaction date probably isn't an option.  

2 hours ago, EBECatty said:

I think your plan document could foreclose it, but generally I'm of the opinion that it's fine as long as the contribution is made with respect to compensation earned before the date of termination. Otherwise, you would be required to calculate all contributions (including final payroll, match, SH nonelective, etc.) and actually deposit them before the proposed termination date. Unless the document explicitly says otherwise, I don't think you would be that constrained. 

I disagree that you would have to deposit contributions before the term date.  I don't see any problem with terminating a plan 12/31/20 and making PS or match contributions in 2021.  And certainly (?!) there is no problem with depositing deferrals after the term date if they were withheld before the term date.  And for the triple play of being argumentative, it is pay dates, not compensation earned dates, that matter.

I think you shut off includible compensation and deferrals as of the plan termination date, provided there is a resolution (and amendment, if necessary) for the plan termination on that date and you're not just assuming the plan terminates because the sponsor is being acquired effective that date. There are various scenarios that could apply depending on the specific M&A transaction. If the sponsor is simply ceasing to exist and the plan needs to shut down and the employees are all terminated from that sponsor (and no formal plan termination resolution/amendment as of X date) then I think you need to look at the plan's post-severance compensation provision for your answer.