Spin Off Plan or New Plan???

[Guest timkbaker]

I need some guidence because I'm lost at this point.

66% of Company A's partners in an LLC decide to start a new business (Company B also an LLC) effective 1/1/02 and resign from Company A. Company B's partners (formarly of Company A) establish a 401(k) Plan.

Company B says that this is a spin-off Plan and participants do not forfeit their non-vested account balances (Company B also recognizes service from Co. A for Vesting). The new fund custodian wants a transfer of all the participant account balances under Company B (probably for commission, etc.)

Company A says the Partners resigned, and as such, are not subject to rights from a spin-off (i.e. they will forfeit non-vested account balances). Additionally, Company A says as terminated participants, they have the protected benefits for receiving their account balances (lump-sum/rollover).

Of course, the "Redemption Agreement" says nothing about the Plan.

Any suggestions as to who is correct?

[Guest pension guru wannabe]

If 66% of the employees are "resigning" it would appear that there would be a partial plan termination and those employees should be fully vested.

[Guest timkbaker]

The partners are not the only participants, there are 6 leaving, 3 staying and 50 other participants so it iw not a partial termination. Thanks for trying.

Tim

[mbozek]

The plan sponsor needs to retain counsel to sort this out and come to an agreement with the participants who have left. One view is that the participants resigned and they are subject to the forfeiture provisons in the plan. You will not get a satisfactory answer that can be relied on on this web site.

[Guest timkbaker]

Since I originally posted this message, the leaving partners forfeited their unvested monies rather than obtaining an ERISA attny. They figured the expense of the attny would probably equal anything that they would have forfeited and so they gave up.

I'd still be interested to hear if anyone else had a similar situation and how it was resolved.

Thanks,

Tim

[mbozek]

One basic rule for spin offs is that the sponsor of the plan from which the assets are to be spun off must agree to the spin off. Vested benefits of the terminated participants can be transferred via a direct rollover to the new plan of these former partners. One rule of corporate breakups is that these issues must be revolved before the partners leave their old firm. By the way were to co B partners advised by counsel before they elected to leave and start their new business???

[Guest timkbaker]

I know they had counsel for the "Redemption Agreement" (the sale of their partnership) but the Pension Plan was not addressed prior to the partners leaving the company. It seems that the Plan is always an afterthought when it comes to mergers/sales/etc. Since my client is the one that stayed, my advise was that the "redemption agreement" stated that the parters leaving terminated on 1/1/02 from the company, so they should treat them as terminated participants for distribution rights and vesting determination.

Tim

[mbozek]

yup-they will be treated as terminated employees under the plan. The departing parting partners suffer the consequences of not being properly advised. Too often bnefit plan issues are ignored because the advisors are ignorant of the value of the benefit rights being given up or they just don't want to to pay for competent advice.

[david rigby]

Oh please tell me these were attorneys!

[KJohnson]

Hey PAX I'm hoping for actuaries.

[Guest timkbaker]

Sorry, they were Anesthesiologists. Good guesses though...