The 401(k) M&A transition period under Section 410(b)(6)(C) of the Internal Revenue Code gives a plan sponsor a temporary pass on federal coverage testing after a merger, acquisition, or disposition changes the workforce. The window runs from the transaction date through the last day of the first plan year that begins after closing, which usually works out to somewhere between 12 and 23 months. Two conditions attach: the plan must have passed coverage testing right before the deal, and its coverage cannot change significantly during the window.1Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards Blow either condition and the relief disappears, exposing the plan to disqualification and tax consequences that hit the employer and participants alike.
How Long the Relief Window Actually Lasts
The clock starts on the date the controlled group change occurs and stops on the last day of the first plan year that starts after that date.1Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards Where the deal closes in the plan year decides everything.
Take a calendar-year plan and a deal that closes on March 1, 2026. Relief begins that day. The first plan year beginning after March 1, 2026 starts January 1, 2027 and ends December 31, 2027. You have roughly 22 months. Move the closing to November 15, 2026 and the endpoint is still December 31, 2027, but the total window shrinks to about 13½ months. Early-in-the-year closings buy the most time.
Short plan years are the trap. If the acquiring employer forces a short plan year right after closing—often to align the acquired plan’s year with its own—that short year becomes the “first plan year beginning after the date of such change,” and relief ends when the short year ends. A three-month short plan year can compress a 20-month runway into a few months without anyone noticing until testing is due.
Who Qualifies for Section 410(b)(6)(C) Relief
Two conditions have to be true. First, the plan must have satisfied coverage requirements immediately before the change in group membership.1Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards A plan already out of compliance cannot use the transaction as cover. Pull documentation of the most recent passing coverage test—ratio percentage or average benefit percentage—before relying on the provision.
Second, the event must involve a change in the membership of a controlled group, an affiliated service group, or a group under common control. The statute reaches any situation where “a person becomes, or ceases to be, a member” of the relevant group, so stock deals, asset purchases, mergers, dispositions, and spin-offs all qualify, and the relief works whether you gained employees or lost them.1Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards
One boundary worth flagging: coverage testing under Section 410(b) aggregates all employees of the controlled group as if they worked for a single employer.2Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules That is the mechanism that makes the relief necessary in the first place. If your transaction did not change controlled group membership, Section 410(b)(6)(C) has nothing to offer.
What Ends the Relief Early: The “No Significant Change” Rule
Relief lasts only as long as the plan’s coverage does not change significantly during the transition period, apart from the change the transaction itself caused.1Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards The IRS treats any change in benefits or benefit levels—amending the benefit formula, for example—as a significant change.3Internal Revenue Service. Revenue Ruling 2004-11 Adjusting the employer match, adding a profit-sharing formula, tightening eligibility, or changing vesting can all cut the window short.
If a significant change does occur, it does not retroactively disqualify the plan. Relief simply ends on the date of the change, and the plan has to pass coverage on its own from that point. The safer approach is to freeze substantive plan design during the transition. Recordkeeper changes and payroll adjustments are administrative and fine. Redesigning who is in and what they get should wait.
Safe Harbor 401(k) Plans
Safe harbor plans layer their own mid-year amendment restrictions on top of this. You generally cannot reduce the group eligible for safe harbor contributions, change the type of safe harbor plan, or amend the matching formula in ways that increase matches mid-year.4Internal Revenue Service. Mid-Year Changes to Safe Harbor 401(k) Plans and Notices Permissible mid-year changes require an updated safe harbor notice and at least 30 days for employees to adjust their deferral elections before the change takes effect. Most sponsors find it easiest to leave the safe harbor plan alone until the transition window closes and they can redesign benefits cleanly.
Using the Window: What to Handle Before It Closes
Once relief ends, the plan has to pass coverage and nondiscrimination testing on the combined workforce with no extension available. Every other decision works backward from that deadline.
Run Testing Projections Early
The Actual Deferral Percentage and Actual Contribution Percentage tests compare deferral and matching rates of highly compensated employees against non-highly compensated employees.5Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests An acquisition that adds lower-paid employees who participate at lower rates makes these tests harder to pass. Preliminary projections several months before the window closes give you room to change plan design rather than correct failures after the fact.
Decide Between Merger and Termination
Merging the acquired plan into yours requires filing Form 5310-A with the IRS at least 30 days before assets are combined.6Internal Revenue Service. Instructions for Form 5310-A It also requires proper asset valuation and compliance with the anti-cutback rules discussed below. Terminating the acquired plan instead forces full vesting of all participant accounts regardless of the normal vesting schedule and distribution of all assets as soon as administratively feasible.7Internal Revenue Service. Terminating a Retirement Plan Whichever path you take, update the Summary Plan Description and give participants clear notice.
Preserve Protected Benefits on a Merger
Section 411(d)(6) bars any plan amendment that eliminates or reduces early retirement benefits, retirement-type subsidies, or optional forms of benefit already available under the prior plan.8Internal Revenue Service. Guidance on the Anti-Cutback Rules of Section 411(d)(6) If the acquired plan allowed lump-sum distributions at age 55 with 10 years of service and yours requires 59½, you must preserve the age-55 option for benefits earned before the merger. You can apply the stricter terms prospectively, but the earned portion keeps its original distribution options. Sponsors who do not want to maintain two sets of distribution rules sometimes terminate the acquired plan pre-merger instead, accepting the full-vesting and distribution consequences that come with termination.
Credit Prior Service Correctly
If you keep the acquired company’s plan going or merge it into yours, all service with the predecessor employer counts for eligibility and vesting as if it had been service with you.2Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules An employee with four years of vesting at the acquired company keeps those four years. If you do not maintain the predecessor’s plan, prior service counts “to the extent provided in regulations,” which leaves some discretion. Acquisition agreements often address service crediting directly, so read the deal documents before defaulting to the regulatory minimum.
If You Miss the Deadline: Correction Windows
A plan that fails ADP or ACP testing after the transition period has two and a half months after the plan year ends to correct excess contributions without triggering a 10 percent excise tax.5Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests After that, the employer owes 10 percent on the excess each year the failure persists.9Office of the Law Revision Counsel. 26 USC 4979 – Tax on Certain Excess Contributions The plan has 12 months total after the plan year ends to distribute excess contributions. Miss the 12-month deadline and the cash-or-deferred arrangement loses qualified status, potentially taking the whole plan down with it.
The standard correction is a Qualified Non-Elective Contribution: the employer contributes enough to non-highly compensated employees to bring the ratios into compliance. QNECs must be fully vested immediately and allocated as a uniform percentage of compensation to all eligible non-highly compensated employees.10Internal Revenue Service. Correction Methods for 401(k) Failures An alternative one-to-one method distributes excess contributions to highly compensated employees and allocates an equal dollar amount as a corrective contribution to non-highly compensated employees. You cannot retroactively adopt safe harbor status to fix a testing failure; the plan has to have been designed as a safe harbor from the start of the plan year.
For failures discovered after these deadlines, the IRS Employee Plans Compliance Resolution System allows self-correction or voluntary correction with IRS approval depending on the severity and timing. SECURE 2.0 expanded self-correction to cover a broader range of inadvertent failures, though the specifics for coverage testing failures are still being clarified through IRS guidance.
What Losing Qualified Status Costs
Disqualification for failing coverage or nondiscrimination hits different people differently. Highly compensated employees must include the entire vested balance in their accounts as taxable income in the year of disqualification.11Internal Revenue Service. Tax Consequences of Plan Disqualification Non-highly compensated employees do not owe tax on employer contributions until the amounts are actually distributed. That distinction gives the employer no relief.
The employer loses its deduction for contributions to the plan. The deduction is deferred until the contribution is includible in the employee’s gross income, and even then the deductible amount is capped at what the employee actually reports. The employer also becomes liable for Social Security, Medicare, and federal unemployment taxes on contributions to what is now a nonexempt trust. Vested contributions trigger those payroll taxes immediately; contributions that vest later shift the withholding obligation to the trust as vesting occurs. For a company that just closed an expensive deal, an unexpected payroll tax bill on years of accumulated contributions is a serious hit.