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401 Chaos

Difference Between Spin-off and Transfer of Assets and Liabilities

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Can anyone confirm my general understanding of the differences between a spin-off and a transfer of assets and liabilities or point me to a good summary of the two actions? Whenever I read the Form 5310-A instructions and other posts here, I fear I may not be fully appreciating the distinctions.

My general understanding is that a spin-off is basically the splitting of an existing plan into two or more plans. After the spin-off, the spun-off plan might live on to function as a new stand-alone plan, might be terminated, or might be merged into some other plan. So, for example, if a company "spun-off" / sold the assets of a particular division and the employees of that division went along with the assets to form a new, separate company, the seller might also spin-off the portion of the existing plan corresponding to the employees of the sold division and the spin-off plan could be used to establish a new, continuing plan for the new company.

I have seen a transfer of assets and liabilities described as basically a spin-off from one plan and a merger into another plan which generally makes sense to me but I'm not sure exactly what all that means or requires. In some cases, the notion of a direct transfer of assets and liabilities seems to be thought of as more streamlined than a spinoff and separate plan merger with TPAs offering to facilitate by basically having the contributing plan amended to agree to the transfer of assets and liabilities for the group of transferring participants and the new plan formally agreeing to accept the assets and liabilities. Does that make any sense?

For example, if we have a company entering into a joint venture with other companies so that the resulting JV will not be a part of the controlled group of any of the "contributing" companies and will maintain its own 401(k) plan going forward, does a transfer of assets and liabilities from an existing plan into the new JV plan make sense and can that be done without thinking of this as a formal spinoff and then separate merger with the JV plan?

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Not sure if this helps, or is simply restating the confusing part, but below is the IRS regulation governing transfers of assets and liabilities (1.414(l)-1(o)). (That's a lower case "L" and a lower case "O" in the cite.) However's easiest to think of the transfer, the regulations will view it as a spin-off of a portion of the transferor plan, then a merger of that portion into the transferee plan.

(o) Transfers of assets or liabilities. Any transfer of assets or liabilities will for purposes of section 414 (l) be considered as a combination of separate mergers and spinoffs using the rules of paragraphs (d), (e) through (j), (l), (m), or (n) of this section, whichever is appropriate. Thus, for example, if in accordance with the transfer of one or more employees, a block of assets and liabilities are transferred from Plan A to Plan B, each of which is a defined benefit plan, the transaction will be considered as a spinoff from Plan A and a merger of one of the spinoff plans with Plan B. The spinoff and merger described in the previous sentence would be subject to the requirements of paragraphs (n) and (e) through (j) of this section respectively.

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Thanks very much. I've pretty much convinced myself that this is the correct way to think about and to document from a board resolution / plan amendment perspective notwithstanding the fact that some record keepers / TPAs might suggest it should be thought of as a more simple or streamlined process along the lines of a fancy trustee to trustee transfer.

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