Workshop 30: It s Greek To Me Real Life Mergers & Acquisitions Presented by Sal Koumantaro s Yannis Tripodi 1
Case Study #1 Duty Trumps Loyalty? Trump Corp 245 employees 401k plan, ADP-tested 50% on first 10% deferred Annual PS contributions average 3% Calendar PY Acquires assets 8-1-2017 Booze Cruz 32 employees SH 401k, CY Match: first 5% comp deferred Case Study #1 (a) Discussion #1 How should Trump plan address immediate coverage of Cruz Employees? Ramifications to the Cruz plan? Trump ADP/ACP tests for 2017 PY Application of HCE test to Cruz EEs Duty Trumps Loyalty? Immediate entry? Credit prior service? Establish separate plan? SH status for 2017? Deferrals included? compensation? Recognize comp and/or ownership with Cruz? 2
Case Study #1 Duty Trumps Loyalty? (a) Discussion #1 IRC 410(b)(6)(C):effect of grant of prior service or amendment of eligibility rules Application of 402(g) and 415 limits by Trump plan to Cruz EEs Significant change to coverage of plan? Timing of amendment? Cruz employees who defer under both plans during 2017? Annual additions under Cruz plan? Case Study #1 Trump Corp 245 employees 401k plan, ADPtested Match: 50% on 1 st 10% 3% Annual PS contributions Does NOT takeover Cruz plan (b) Discussion #2 Parties negotiate that trump plan, for 2017, will apply cruz plan to acquired employees 410(b)(6)(C) ACP testing? BRF? Duty Trumps Loyalty? Booze Cruz 32 employees SH 401k Match: first 5% comp deferred Does not want interruption of 401k participation for its employees Calendar PY 3
Case Study #1 (c) Discussio n #3 Trump agrees to take over Cruz plan Duty Trumps Loyalty? Freeze of Cruz plan; Cruz EEs eligible for Trump plan? Cruz plan remains active, Trump plan amended to exclude Cruz EEs? Plans are merged? Effect on SH 401k? Trump plan amended to SH 401k mirroring Cruz plan? Separate plans for 2017; merger 1-1-18; SH nonelective; Trump? Case Study #1 Trump Corp 245 employees 401k plan, ADPtested Match: 50% on 1 st 10% 3% Annual PS contributions Does NOT takeover Cruz plan (D) Discussion #4 Cruz on 6/30 PY Plans are merged Effect on SH? Effect on ADP/ACP? What if BOTH plans ADPtested? July 1, not Aug 1, is effective date? Duty Trumps Loyalty? Booze Cruz 32 employees SH 401k Match: first 5% comp deferred Does not want interruption of 401k participation for its employees Calendar PY 4
Orange Prisons buys stock of Black Works SH : 1 st 6% disparity PS Acquires stock on March 18, 2018 Black Works Piper is 100% owner Cash + 2% of Orange 1 st 3%, Merger? Orange Prisons (a)discussion #1 SH : 1 st 6% Acquires stock on March 18, 2018 3-18-18, Black is sub of Orange Both plans continue Distribution rights? Only Orange has catch-up? 5
Orange Prisons (a)discussion #1 SH : 1 st 6% Acquires stock on March 18, 2018 3-18-18, Black is sub of Orange Both plans continue SH status of plans for 2018 and 2019 PYs? HCEs in each plan? Orange Prisons (a)discussion #1 SH : 1 st 6% Acquires stock on March 18, 2018 3-18-18, Black is sub of Orange Both plans continue by Black in 2019? Different BRFs? 6
Orange Prisons (a)discussion #1 SH : 1 st 6% Acquires stock on March 18, 2018 3-18-18, Black is sub of Orange Both plans continue Top heavy rules: 12-31-17 Orange not TH but Black is? 2020 PY? Orange Prisons (b) Discussion #2 SH : 1 st 6% Acquires stock on 3-18- 18 Plans merged on June 30, 2018 Separate formulas for 2018 and adoption of Orange for all EEs in 2019? 7
Orange Prisons (b) Discussion #2 SH : 1 st 6% Acquires stock on 3-18- 18 Plans merged on June 30, 2018 Merged plan provides Orange for all EEs? SH status retained? under merged plan? Orange Prisons (b) Discussion #2 SH : 1 st 6% Acquires stock on 3-18- 18 Plans merged on June 30, 2018 Existing loans to Black EEs? Effect of repayment suspension? Differences in investment options? 8
Orange Prisons (c) Discussion #3 Plans remain separate SH : 1 st 6% 401(a)(4) testing of permitted disparity allocations under Acquires Orange plan? stock on 3-18- What if amended 18 to new comp formula? Orange Prisons (d) Discussion #4 100% of 1 st 6% Acquires stock on 3-18- 18 Plans remain separate but are NOT safe harbor plans How should ADP/ACP testing be performed? What if plans are merged in 2018? 9
Orange Prisons (e) Discussion #5 SH 4101k 100% of 1 st 6% Acquires stock on 3-18- 18 Plans remain separate; Black plan amended to adopt Orange Amendment adopted on 6-15- 18, prospective? Crazy Eyes & Assoc (TPA) didn t draft amendment? (f) Discussion #6 Parties decide to terminate the Black plan Timing of the termination? Continuation and amendment of Black plan? Coverage of Black employees in Orange 401k plan? 100% of next 2% 10
Case Study #3 Br eaking Plans Heisenberg Inc Owner: Mr. White SH 401k DB plan 250 employees 21 Case Study #3 Br eaking Plans (a) Discussion #1. Blue Sky forms new 401k plan Can it be a SH? If not SH, how is ADP/ACP testing approached? 22 11
Case Study #3 Br eaking Plans (b) Discussion #2. New deal Sept. 2018 Increase in hiring over next 12 months 1 year eligibility added to SH 401k Timing of amendment? Effect on SH status? 23 Case Study #3 Br eaking Plans (c) Discussion #3. Blue Sky adopts both a 401k and a DB plan EEs accounts in Heisenberg plans directly transferred Distribution rights? Effect on SH status? ADP-tested 401k? 24 12
Case Study #3 Br eaking Plans Heisenberg Inc Owner: Mr. White SH 401k DB plan 250 employees 40 transferred to Blue Sky (d) Discussion #4. EEs acquired by Blue Sky are cashed out of Heisenberg plans How is vested interest determined? Does timing of participation in Blue Sky plan matter? Partial termination? 25 Case Study #3 Br eaking Plans Heisenberg Inc Owner: Mr. White SH 401k DB plan 250 employees 40 transferred to Blue Sky (e) Discussion #5. SH contributions for transferred EEs? Allocation of ER contributions under 401k plan for transferred EEs? Accrual rights under DB plan for transferred EEs? 26 13
Heisenberg Inc Owner: Mr. White SH 401k DB plan 250 employees 40 transferred to Blue Sky Case Study #3 Br eaking Plans (f) Discussion #6. Mid-year bonuses paid on 6-30-18, some to transferred EEs Allows deferral from bonuses Suppose another round of bonuses on 1-20-19, some to transferred EEs (g) Discussion #7. Heisenberg plan subject to distribution restrictions under IRC 436(d) 27 Case Study #4: We re Never Getting Back Together Dee J Musicworks Red Lipps Inc. Both companies owned by Taylor and Calvin Each owns both corporations (brother-sister group) 401k plan Buy each other out, eff 8-1-18 14
Case Study #4: We re Never Getting Back Together 100% owner of Red Lipps, Inc. 100% owner of Dee J Musicworks Case Study #4: We re Never Getting Back Together (a) Discussion #1. Companies continue to maintain 401k plan jointly SH 401k status? What if 401k is ADPtested 15
Case Study #4: We re Never Getting Back Together (b) Discussion #2. Dee J adopts new DB plan Credits prior service with Dee J? Compensation to compute average comp? Case Study #4: We re Never Getting Back Together (c) Discussion #3. 401k plan splits into 2 plans, eff 8-1-18 Plan terms remain identical for rest of 2018 Effect on 401k SH? Effect on ADP testing? 16
Case Study #4: We re Never Getting Back Together (d) Discussion #4. In conjunction with establishment of DB plan (see Discussion #2), Dee J terminates its 401(k) plan 17