Spin-Off Plan Question

[Guest R. Cheryl]

Company A sells Company B effective July 1, 1999. For the remainder of 1999 Plan Year and for five months of 2000 Plan Year, Company B is a participating employer in the Company A 401(k) Plan, which is therefore treated as a multiple employer plan from July 1, 1999 through May 31, 2000. Company B establishes its own Plan effective June 1, 2000 and the portion of the Company A Plan that covered the Company B employees is “spun-off” to the new Company B Plan. In 2001 the Company B Plan is fully restated for GUST (effective back to its initial June 1, 2000 effective date) and will be submitted to the IRS for a determination letter.

1. While the Company B Plan is drafted as having a June 1, 2000 effective date, Company B did all if its 2000 testing on a calendar year basis as if its multiple employer piece of the Company A Plan that was spun off and the Company B Plan spin-off plan were one Plan for all plan coverage, testing, compensation purposes for 2000. Is that correct or should the two separate plans be tested separately for each portion of the year that it was in existence?

(Company A included Company B in its testing for the period January 1, 1999 – June 30, 1999 and Company B tested from July 1, 1999 – December 31, 1999 on its own.)

2. Company B plans on submitting its 2001 GUST Restatement for a determination letter. I assume it also should submit its initial Plan document effective April 1, 2000. What about the Company A Plan? I assume that Company B does not need to be concerned with submitting the Company A Plan, even though a portion of it was “spun-off” into the Company B Plan. Is that correct? Can the Company B Plan receive a “clean” determination letter without submitting anything relative to the Company A Plan?

Thanks for your help on this.

[IRC401]

You have three possibilities:

1. B set up a new plan, and assets from (multiple employer) plan A were transferred to it. (asset transfer)

2. Plan A was divided into two plans, A and B (split-up or spin-off).

3. Plan A was divided into two plans, and one of those plans was merged into the new plan B.

The answer to your questions depends on what happened. If #1 happened, you have to deal with two separate plans and need to figure out if you can aggregate part of a mulitple employer plan with a single employer plan for testing purposes.

If #2 or #3 happened, you picked up a pre-GUST plan with all of its history, and see the post on merging a GUST and non-GUST plan.