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DC Plan Termination - No Successor Plan - Outstanding Participant Loans


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Company A does not have a retirement plan. Company B has a 401(k) profit sharing plan. Company A acquires Company B. Company A does not want to have a retirement plan and wants to terminate Company B's plan. Company B has partcipants with outstanding participant loans. All Company B employees will become employees of Company A.

Can Company A terminate Company B's plan and what would happen to the outstanding loans?

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What does the purchase agreement say about stock vs. assets and how does it address what happens to Company B's plan? If the plan is terminated by whomever then outstanding loans would be treated as distributions and be taxable to the participants. Just my 2 cents.....

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Check the plan document to see what it says happens to loans in the event of plan termination. Chances are, it will say that any unpaid balances are offset, which means that they would become taxable to the participant.

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wmyer:

Maybe I'm missing something because I'm very tired, but why do you have to consult with the plan documents?

How could you have an outstanding loan continue after the plan is terminated? To whom would the person make the loan repayments?

Wouldn't the continued existence of the loan be fundamentally inconsistent with the termination of the plan?

Kirk Maldonado

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If the plan permits distribution in cash or kind and the promissory note supporting the plan loan permits assignment or transfer, it is possible to distribute the note. If the participant could find a plan or IRA willing to accept the rollover in kind (i.e. accept the note) the participant could avoid the income tax hit at the time of the distribution (subject to issues if they default on their repayment obligations).

I have seen plan loans transfered to the buyer where the plan loan is rolled into the buyer's plan and payroll deductions continue to be made to repay the loan. I have never seen an IRA provider accept a loan/note in a rollover, but it is theoretically possible.

Hope this helps.

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