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Guest Ray Goetz

Spinoff/Merger -- 414(L) -- asset transfer amount

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Guest Ray Goetz

I have a question on the actions needed under 414(L) to properly complete a spinoff/merger from a defined benefit pension plan.

The rules make it clear that if you have an "asset transfer" from one defined benefit plan to another, it is viewed as a spinoff, followed by a merger. T.R. 1.414(L)-1(o). And the spinoff rules then present a "safe harbor," stating that everything will be okay if the value of the assets allocated to the spun off plan is not less than the value of the benefits, on a termination basis, in orginal plan for each transferred participant. T.R. 1.414(L)-1(n)(ii).

Here is the question. Often the original plan will not be fully funded on a termination basis. So the above safe harbor will not be available. If you do NOT use the safe harbor, is there ANY rule on the amount of assets that have to be transferred to a spinoff plan (maintained by an unrelated employer)?

The main thrust of the statute and the regs here is on preserving the BENEFITS for the transferred employees, and not on required amounts of assets to be transferred. And the rules about dividing up any "excess assets" in the original plan do not apply if there are no excess assets (and they also do not apply if the transfer goes outside of the controlled group). IRC 414(L)(2).

A. So is there any rule on any "minimum" amount that must be transferred to the spinoff plan, if the safe harbor rule is not going to be used? Or is this just a business decision for the parties to agree upon?

B. If a tiny amount is transferred, does that just mean that the spinoff plan simply has some contribution obligations, pursuant to the 412 funding requirements? Could the parties agree to a tiny asset transfer, or to no asset transfer?

C. Similarly, would there be any 414(L) limitation upon an agreement that the assets transferred would be reduced for any market declines in the assets that were held by the original plan, after the calculation of the benefits that were being transferred had occurred, but before the actual transfer of assets?

D. Is there any express authority on these points?

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Guest JAREL

It is my understanding that if the spinoff is from a plan that has no "excess" assets, the assets must be allocated in the manner prescribed by ERISA Section 4044, utilizing the various priority catagories, which limit the benefits in the catagories to those guaranteed by PBGC, and which phase in plan amendments and service credits for certain employees. These rules are fairly precise with respect to allocation, except that actuarial assumptions just have to be reasonable.

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