Rollover Question

[Scott]

Company A purchased the assets of Company B. Company B is terminating its 401(k) plan and will distribute all account balances upon receipt of a determination letter. The Company B employees who are now employed by Company A will be allowed to rollover their distributions into Company A's 401(k) plan.

There are several former employees of Company B who terminated employment with Company B prior to the asset sale. They did not become employees of Company A and have never otherwise been associated with Company A. Company A would like to allow those individuals to rollover their accounts into Company A's plan if they desire.

Can this be done? Company A's plan will have to be amended to provide for this, but is there anything under the Code that would prohibit this?

[david rigby]

Seems unlikely to fit with the intention of the Code. As you describe it, the former employees of B were never employees of A. Any qualified plan is usually for the employees of the plan sponsor (and their beneficiaries).

IRC 401(a)(1) includes the phrase "...for the exclusive benefit of his employees or their beneficiaries....

BTW, why does A want to be so generous with these people who were never A employees?

[Scott]

That was my first thought as well, and the concept still doesn't smell right to me, but the definition of "eligible retirement plan" under Code Section 402©(8) and the regulations is "a qualified plan or an individual retirement plan." There is no limitation under that definition, and I haven't found a limitation elsewhere, that it must be a plan under which the recipient of the distribution participates or is eligible to participate.

I'm not convinced that it's OK yet, but assuming it can be done, would this have any undesirable side effects on Company A's plan? For example, would it somehow become a multiple employer plan since it holds benefits related to service by individuals for another employer?

As for why Company A wants to do this, Company A's plan is very large, and because of that, it has some leverage in dealing with the plan's trustee/custodian (i.e., we're giving you a lot of plan assets--if you don't treat us right, we'll take it elsewhere). These former employees of Company B have about $15 million in their accounts, so allowing them to rollover into Company A's plan would increase that leverage even more.

[Scott]

pax,

Your "exclusive benefit" point is a good one, but what if, rather than terminating Company B's plan, Company A assumed that plan and merged it into Company A's plan. Those former Company B employees' accounts would have come into the Company A plan automatically. Would that violate the exclusive benefit rule?

[david rigby]

I don't think a plan merger is a problem. It happens all the time. However, it usually happens when A purchases B, not just the assets of B. If B still exists, then it might be the plan sponsor. You need some qualified legal beagle to tell you if that distinction is important.

Also, note that merging the plan (or purchasing all of B for that matter) will certainly shift any potential liability from B to A, if there are any skeletons in B's closet.