Plan Termination Question

[card]

Assume a large corporation sells off all the assets of a small division of 50 employees (and all 50 employees go to the buyer). The division has its own 401(k) plan. The corpoation would like to terminate the division 401(k) plan and distribute assets in 2001. (Assume the asset sale exception for 401(k) distributions does not apply.)

Since there are other defined contribution plans in the controlled group the corpoation can terminate and distribute assets only if the 2% test is met. The 2% test looks at the eligible employees as of the plan termination date.

Is this rule avoided simply by choosing a termination date after the closing date? On the day after the closing there will be no employees eligible for the division 401(k) plan- they will all have terminated employment.

If instead the corporation terminates the plan prior to the closing, is the 2% test violated if one of the terminated employees is rehired into the corporate controlled group within 12 months following the termination date? That is, for purposes of the 2% test do you need to track terminated/rehired employees?

Thanks.

card

[RCK]

I think that there is only one easy answer to this one: if the acquirer does not have a 401(k) anywhere in their controlled group, then get them to take the plan along with the division and people. Then they can terminate the plan and distribute assets. You might have to provide them with some encouragement to do this--it can be an expensive and time-consuming process.

I cannot claim to be an expert in this area--my perspective is that of a sponsor that has done frequent acquisitions and a few sales. So, you are getting what you paid for--free advice.

RCK