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Severance From Employment?

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I have a bit of a reverse spin on the usual "severance from employment" issue.  Holding Company owns Company A and Company B.  Company A sponsors a plan that covers everyone in the group.  If Company A is sold in a stock deal and takes the whole plan with it, clearly Company A employees have not had a severance from employment.  There is plenty of guidance on that.  But what about the employees of Company B?  I would think they have had a severance from employment because the plan sponsor is no longer part of the controlled group, but I haven't found anything to confirm that.  I can see how it would be difficult to explain to Company B employees that they have experienced a severance from employment, even though their company wasn't the one sold.

If this is indeed a severance, I assume it could be avoided by spinning off the portion of the plan that covers Company B prior to the transaction.

I have been surprised that I have not found any guidance on this yet.  I know this is not the typical M&A situation, but I have to imagine that it still happens fairly regularly.  Thoughts?  Thanks!

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I think what you have is a multiple employer plan.  Some volume submitter plans contain language automatically amending the plan to a multiple employer plan upon certain situations.

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Most likely the plan says that it covers employees of Company B and of members of B's controlled group that have adopted plan. Because A is no longer in B's controlled group, B's employees are, under such language, no longer eligible to participate (unless the plan is amended to make it a multiple employer plan, as Griswold suggests), and because they have ceased to be employed by the 414(b)/(c) "employer" that maintains the plan, they have experienced a separation from service. For a 401(k) plan, see Treas. reg. 1.401(k)-1(d)(2) and the definition of "employer" in 1.401(k)-6.

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