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A Better Partnership


Dec 2013
December 02, 2013

Five Benefit Plan Changes to Address Prospectively

“We recently acquired another company. Now we need to terminate its plans and update our plans to show those employees joined.”

Regularly, I hear about changes like this, but the problem? It’s after the fact and too late to act. Action needs to be taken before a change. After, the options are limited and potentially more expensive. Here are five changes that should be addressed by management, benefits personnel and counsel prospectively.

1. Acquisition or Sale of Entity:

Perhaps the most significant change to address prospectively is the acquisition or sale of an entity or its assets. This can be a PBGC reportable event and may require fully funding a pension plan. It can be a COBRA event that affects group health coverage. Also, it can impact retirement plan nondiscrimination testing, design and reporting. If seller and buyer don’t plan for the transition prospectively, it can adversely affect either or both of their plans.

For example, in a stock sale where the buyer will continue the employment of the acquired entity’s employees, the buyer generally loses the ability to terminate the entity’s 401(k) plan and make distributions after closing.  The buyer will then have to merge the acquired entity’s plan into its own or ensure all of its plans can pass the necessary testing to remain separate. The plan merger option can be expensive, time-consuming and administratively inconvenient, forcing the buyer to make certain changes to its plan. Existing compliance problems also follow the plan in a merger. Yet, separate plans can be costly to maintain and testing must continue to be done annually to ensure the plans can remain separate. Neither post-closing option is desirable. Usually, it’s preferable to terminate before closing.

The buyer also needs to act to add the seller’s employees to its plans. For a seamless transition, the buyer generally must authorize participation of the seller’s employees in the 401(k) plan before, or immediately after, closing. The buyer also should ensure its management, benefits personnel and counsel understand how the new organization will be related to the buyer and any other related entities. Those relationships directly affect the benefit plan transition options.

2. Workforce Changes:

Shifting workers to or from a leasing agency, temporary status or another related entity can create numerous benefit plan issues. For example, the classification of temporary workers may affect an organization’s status for health care reform purposes (as discussed in Norbert Kugele’s recent article ( Changes in status create challenges, too. A worker’s history with an organization is relevant to determining retirement plan eligibility and vesting credit. Plans that have a shorter eligibility waiting period are at particular risk of failing to include a worker following a status change. Also, if a worker ceases to be the plan sponsor’s employee or transfers to another related entity, that worker may become ineligible for the sponsor’s plan when the change occurs.

3. Potential Prohibited Transactions:

Benefits plans are subject to complicated rules that are broadly designed to prevent conflicts of interest from adversely affecting them. A transaction that violates these rules is referred to as a “prohibited transaction.” Prohibited transactions can be very costly to address and audit activity to catch them has increased. For example, if an organization receives more favorable loan or banking terms when moving its retirement plan assets to the same institution, that could be a prohibited transaction. Additionally the Department of Labor may ask about that type of thing on an audit. Another example would be an owner of the plan sponsor selling property to the plan. Unless that transaction falls within a limited exemption such as for an ESOP purchasing stock, it will be a prohibited transaction. Accordingly, it’s crucial to consider in advance whether a transaction might be prohibited, even if a direct change to the plan isn’t involved.

4. Early Retirement/Window Programs:

Planning a voluntary early retirement or window program? That program itself could constitute a plan subject to ERISA, even if it doesn’t look like a plan. If it’s an ERISA plan, the documentation of it must be crafted carefully to comply. The program design also must be reviewed for consistency with the organization’s existing plans. For example, 401(k) or 403(b) deferrals from severance pay generally aren’t permissible. Whether paid time off awarded under a program may be deferred, however, depends on the terms of the applicable plan. On the health plan side, the plan’s insurer or stop loss carrier should prospectively approve changes in eligibility for health coverage.

5. IRS Tax ID Change:

A plan sponsor’s IRS tax ID number – also known as the employer identification number or EIN – may dictate the restatement deadline for its retirement plans if they are “individually designed.” A plan is individually designed if it does not use a pre-approved IRS prototype or volume submitter plan document. Such a change could accelerate the plan’s restatement deadline. Missing that deadline jeopardizes a plan’s tax-qualification and is costly to correct. A change in tax ID also affects annual Form 5500 returns. The plan sponsor is likely to receive a Department of Labor letter asserting there was a failure to file the Form 5500 if the change isn’t reported properly.

Prospective communication about the changes described above is critical to control costs, keep plans compliant, maximize benefits and administer plans efficiently. These changes often are not red flags for those who have limited exposure to benefits. It is critical for benefits professionals to be proactive in letting management know these changes should be addressed prospectively and for management to consult benefits personnel and counsel ahead of time when such changes are contemplated.

Our Employee Benefits attorneys regularly advise clients on benefit plan changes.  Please contact one of us for assistance with planning for, or responding to, such changes.

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