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Asset or Stock Sale—Which Could Trigger a Plan Distribution?

An advisor asked:  “Between an asset and stock sale of a company, which transaction could trigger a plan distribution for participants?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from San Diego, CA is representative of a common inquiry involving company mergers and acquisitions and what happens to the retirement plans of the involved entities.

Highlights of the Discussion

That is somewhat of a trick question because there is a “general” answer and then there is the “facts and circumstances” answer. Let’s take a look at both answers.

Generally, in a “stock-for-stock” sale, the buyer acquires everything (i.e., “lock, stock and barrel”), including any retirement plans. Consequently, the acquired employees would not incur a severance from employment and, therefore, would not have a distribution triggering event as the buyer would, most likely, assume responsibility for the seller’s plan. In that case, the buyer could choose to merge the acquired company’s plan into its own plan (if one existed) or maintain the plans separately.

Generally, in an asset sale, the acquiring employer would not acquire or continue the seller’s plan, resulting in termination of the seller’s plan and a distribution triggering event for its participants.

However, taking a general approach to complicated transactions like stock and asset sales can land one in hot water. The most prudent approach is for the entities involved to specifically address what will happen to the retirement plans as part of the M&A negotiations.

For example, based on the facts and circumstances of the M&A transaction, it is possible, in a stock transaction, that the merger agreement could specify that the seller terminate its retirement plan. Plan termination would need to be completed prior to the closing date of the merger. If the plan is terminated in a manner compliant with requirements for plan termination, the participants of the seller’s plan would have a distribution triggering event.

Similarly, based on the facts and circumstances of the situation, the merger agreement could specify that the buyer will assume sponsorship of the seller’s plan after the asset sale is complete and, therefore, forestall a distribution triggering event.

Plan assessment tools are helpful in M&A situations. For example, the Retirement Learning Center offers a service called the Plan Forensic Analysis, which is a comprehensive assessment of retirement plans and their provisions, used most often to compare two or more plans involved in an M&A scenario. Such a review is helpful for advisors and their plan sponsor clients to identify potential issues and options as part of the M&A process so there are no surprises (e.g., what will happen to the plans, how do we deal with protected benefits and/or who is responsible for plan corrections).

Conclusion

Generally speaking, a stock sale will not result in a retirement plan distribution opportunity for participants, while an asset sale will, unless the merger agreement specifies otherwise. The most prudent approach to handling retirement plans in an M&A scenario is to address the plans head on as part of the transaction negotiations, use plan assessment and comparison tools, and document decisions.

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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UPDATE: Who is an Independent Contractor?

An advisor asked, “Who is considered an ‘independent contractor,’ and should he or she be included in the retirement plan of the employer who contracts for his or her services?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry involving independent contractors and retirement plan eligibility.

Highlights of the Discussion

  • This is a very timely question because the Department of Labor (DOL) has gone back and forth regarding its final definition of independent contractor in 2020 and 2021. Because determining the correct worker status is an important tax question it is advisable to seek the help of a qualified tax professional. What follows is a general explanation of the DOL’s independent contractor rules for educational purposes only as they stand to date.
  • First, a little background. Historically, the industry has looked to the Fair Labor Standards Act of 1938 (FLSA), court rulings and informal guidance from the DOL and IRS to help define who is an independent contractor (and not an employee).
  • The U.S. Supreme Court on several occasions has ruled that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation that controls. Among the factors which the Court has considered significant are
  1. The extent to which the services rendered are an integral part of the principal’s business.
  2. The permanency of the relationship.
  3. The amount of the alleged contractor’s investment in facilities and equipment.
  4. The nature and degree of control by the principal.
  5. The alleged contractor’s opportunities for profit and loss.
  6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
  7. The degree of independent business organization and operation.
  • In September 2020, during the Trump administration, the DOL issued proposed regulations that would have provided an “economic reality” test to determine a worker’s status as an independent contractor. On January 6, 2021, the DOL issued a final rule clarifying the standard for employee versus independent contractor based on the economic reality test. The effective date of the final rule was March 8, 2021. However, on February 5, 2021, at the start of the Biden administration, the DOL published a proposal to delay the independent contractor rule’s effective date until May 7, 2021. On March 4, 2021, after considering approximately 1,500 comments received in response to that proposal, the DOL published a final rule delaying the effective date of the independent contractor rule to May 7, 2021. Then, on May 5, 2021, after reviewing approximately 1,000 comments it received, the DOL withdrew the independent contractor final rule. The end result—the DOL’s most recent independent contractor rule never took effect.
  • Consequently, it is “back to the future;” the DOL’s longstanding prior guidance addressing the distinction between employees and independent contractors under the FLSA remains in effect (see Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA).
  • The IRS has some helpful online information as well on determining worker status at Independent Contractor (Self-Employed) or Employee?
  • In a nutshell, the determination of whether a person who provides services to a business is considered an employee or independent contractor is based on the degree of “control or direction” provided by the business to the worker and is dependent upon the facts and circumstances of each case. Generally, an individual is an independent contractor if the business for which he/she performs services, does not control the means or methods used by the worker to accomplish the promised result. It is important for the business owner to look at the entire relationship with the worker, consider the degree of his or her right to direct and control the worker’s actions and, finally, to document each of the factors the business owner uses to arrive at the determination.
  • As an alternative, a person or entity can ask the IRS to make a formal determination on a worker’s status by filing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The filing takes at least six months to process.
  • With respect to retirement plan participation, a person who meets the definition of an independent contractor is not an employee of the business for which he or she provides services and, therefore, would not be eligible to participate in the business’s retirement plan.
  • However, an independent contractor could contribute to his or her own retirement plan based on his or her self-employment income.

Conclusion

Determining whether a worker is an employee or independent contractor for tax purposes as well as retirement plan coverage purposes can be tricky.  In 2020 and 2021, the DOL floated regulations which were later withdrawn, that included an “economic reality” test, to determine a worker’s status. The DOL’s longstanding prior guidance addressing the distinction between employees and independent contractors under the FLSA remains in effect Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA).

 

 

© Copyright 2021 Retirement Learning Center, all rights reserved
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Pooled Plan Providers to Date by State

An advisor asked:  “Do you have any statistics around how many Pooled Plan Providers (PPPs) for Pooled Employer Plans (PEPs) have registered with the Department of Labor (DOL), and where they are located?”    

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to Pooled Plan Providers.

Highlights of the Discussion

Yes, we do have some statistics based on a tool on the DOL’s website that shows PPP filings. As of August 3, 2021, the number of PPPs that have registered with the DOL to be able to offer PEPs is 117.* Keep in mind that number will continue to change. Registering with the IRS and DOL is one of the requirements for a firm to become a PPP of a PEP.  Below is a summary of the number of PPPs by state.

Pooled Plan Providers by State*

AR 1
AZ 3
CA 4
CO 1
CT 3
FL 42
GA 2
IL 6
IA 2
KS 1
MD 1
MA 3
MI 1
MN 6
MS 2
NB 1
NV 1
NJ 4
NY 9
OH 1
PA 6
SD 2
TN 1
TX 8
UT 4
VA 1
WA 1
TOTAL 117

*(As of 08.04.2021. States without registrants omitted.)

The most likely entities to serve as PPPs include financial institutions, such as banks and insurance companies, record keepers, large broker/dealers, registered investment advisor firms, payroll providers and local chambers of commerce.

To encourage more businesses to sponsor workplace retirement plans, Congress created PEPs, available for adoption starting in 2021 through registered PPPs. PEPs are new plan structures created by a segment of the Further Consolidated Appropriations Act of 2020 also known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act. These new plan arrangements allow two or more completely unrelated employers to participate in a single retirement plan administered through a registered PPP. Each employer has the fiduciary duty to prudently select and monitor the PPP and other fiduciaries of the PEP.

The idea behind PEPs is that employers would be more inclined to offer retirement benefits if they could band together to reduce the burdens and costs of plan maintenance. And, to sweeten the deal, the special plan startup tax credits in the SECURE Act allow eligible employers to receive up to $5,000 in tax credits for the first three years and offer an additional $500 tax credit for adding an automatic enrollment feature that can be used with PEPs.

Conclusion

PEPs became available for adoption starting in 2021 through registered PPPs. Thanks to a tool on the DOL’s website, the industry can stay up to date on PPP registrants.

© Copyright 2021 Retirement Learning Center, all rights reserved