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How Do You Protect the Recipient Plan in a Plan to Plan Transfer?


rocknrolls2
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  1. 1. How Do You Protect the Recipient Plan in a Plan to Plan Transfer?

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Protection of Plan Receiving Assets from Other Plan in Merger or Spin-off

Assume that Company A, a Fortune 500 Company, is in the process of making a number of acquisitions. Company A maintains Plan X, a 401 (k) plan. What are people doing in each of the following situations to protect the qualification of Plan X: (a) Company A buys Company B and merges its Plan Y into Plan X; (B) Company A buys the assets of a trade or business of Company C, another Fortune 500 Company, where the trade or business employs 75 employees; © Company A transfers 30 employees of Company A's subsidiary, A-1, and wants to transfer their account balances under Company A-1's plan, Plan Z, into Plan X. Company A-1 has taken a number of aggressive positions on a number of issues involving Plan Z; and (d) assume the same facts as in example ©, except that Company A-1's CEO is transferred to Company A and only her account balance under Plan Z is spun off into Plan X.

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  • 2 weeks later...

Get current determination letter from transferring plan and get necessary reps that plan is qualfied in operation. IRS rules let transferror plan of direct rollover rely on rep from plan administrator that plan is qualified.

Other option is to have participants rollover distribution to conduit IRA and then do rollover to buyer's plan.

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The facts of my example assumed plan to plan transfers or elective transfers. In your replies, you are referring to rollovers. I am aware of the regulations and that they allow you to disgorge the tainted plan's assets with earnings within a reasonable time of discovering the problems with the transferor plan. In light of EGTRRA, these rules need to be expanded to cover rollovers from 403(B)s and governmental 457(B)s. But back to the crux of my question, what protection, if any, does the recipient of a plan to plan transfer or an elective transfer have? To me, this area shoudl be the focus of reform!

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You seem to be looking for some kind of guarantee /immunization for the recieving plan if the transferred assets come from another plan. This is what due dilligence is all about. If there are questions about the transferring plan's qualified status under 401(a) then the assets should not be transferred until the questions are resolved. If there are no questions about the qualified status then the asset transfer should be completed. Only completely safe way of transferring assets is to spin off the assets of the tranferred employees into a separate plan and get an IRS determination letter.

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MBozek, In general, I agree. However, reps and warranties are only as good as the financial stability of the entity giving them and often there could be problems arising after the statute of limitations. For anyone who has done due diligence, you often don't get all the info you ask for, you have a limited time in which to do it, even if you ask for additional information, the go-to person doesn't get back to you or doesn't supply all the relevant info, the deal gets closed and all you have to rely upon are the reps and warranties and an indemnification. Also doing a compliance audit is expensive and it is unlikely the other side will agree to it if you are only buying a small block of business.

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While I agree with your statements that the due dilligence process is less than ideal for qualified plans because important questions are frequently not answered before closing, in my practice there is always a caveat on buyer accepting assets from another plan until I am satisfied that it is qualified. I have advised clients not to accept asset transfers from seller's plans from which there were questions on the plan's qualification. Purchase agreement should always reserve the right of the buyer's plan to accept assets only if such plan is determined to be qualified in the opinion of buyers counsel. If counsel has reasonable doubt on the plan's qualification then don't accept the assets. The employees can uisually rollover the funds to an IRA and then into buyer's plan.

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