Spin-offs and Cafeteria Plan Balances

[Guest 91smithie]

My client is spinning-off two companies, one in a stock deal and one in an asset deal. Both the spun-off companies want to transfer the balances over to the new organization. How is this legitimately done? I cannot find anything in the Internal Revenue Code which permits this. In addition, how would discrimination testing be done?

[mbozek]

Like many other things that occur in practice there are no IRS provisons that cover the spining off of assets in a cafeteria plan. IRS position is to do whats right. Seriously, since the accounts of the participants are employer assets usually there is a transfer of funds in assets sales that approximate the amount of the transferred employee's accounts in the seller's plan which becomes the opening account balance in buyer's cafeteria plan. In stock sales the employee's account balances are assets of the employer which should be tranferred as the equity of the employer in the ongoing cafteria plan. You need to consult with counsel to make sure that the proper language is contained the the purchase agreements.