Terminating and successor plans

[Guest ebpcpa]

I have a client that is interested in terminating its 401(k) plan. The Company was told that it could not create a sucessor plan until the end of the 2003 if the current plan was terminated. Has anyone heard of this? I can't find any authoratative literature on this topic. Thanks.

[2muchstress]

Why would they want to start a new plan immediately after terminating the old one.

Termination fees and start up fees would be expensive. Couldn't they just amend their existing plan to accomplish what they are trying to do.

[QDROphile]

The rule is in the 401(k) regulations. 1.401(k)-1(d)(3).

[Guest ebpcpa]

Got it now. Thanks.

[billfgrady]

Company A is purchased in a stock transaction by Company B. Both Company A and Company B maintain 401(k) Profit Sharing Plans. The documents indicate that Company A's Plan will terminate "contemporaneously" with the closing of the transaction. This makes me a little nervous given that Treas. Reg. 1.401(k)-1(d)(3) applies the term employer "as of the date of the plan termination." Any help with the timing on this one?

[mbozek]

Whoever drafted the purchase agreement obviously wasnt aware of the Reg. The plan of the acquired corp should be merged with the purchaser's plan since the employer will continue after the date of acquisition. 401(k) plans are always merged in stock deals to avoid problems.

[KJohnson]

From my experience the most common practice in stock deals is for the acquired company to terminate its plan prior to the close of the deal. The IRS has stated time and again that this works. Here is an IRS Q&A from the 2000 conference

Q.25.

Company A buys Company B in a stock transaction. Each Company

maintains a 401(k) plan. Company A requires Company B to terminate its plan the day before the purchase of B closes. B employees will become participants in A’s plan within 12 months of the date of termination of the B plan. Is A’s plana “successor plan” under 1.401(k)-1(d)(3) such that distributions cannot occur to B employees that will participate in A’s plan? The second sentence of 1.401(k)-1(d)(3) says that “… the definition of the term "employer" contained in paragraph (g)(6) of this section is applied as of the date of plan termination, and a successor plan is any other defined contribution plan maintained by the same employer.” Since A becomes part of a controlled group with B on the date of acquisition is the B plan “maintained by the same employer?”

Answer

The controlled group/employer is determined the day before the transaction takes place. After the transaction takes place a new controlled group/employer exists. Accordingly the distributions may be made.

I thought I remembered seing some "soft guidance" that the termination could actually take place at the time of the transaction. but if this guidance does exist I can't put my finger on it.

The one aspect that has always troubled me is not a stock deal where the controlled group changes but there remains two separate corporations but the case of a statutory merger where two corporations actually become one. In that instance the merged enity "is" each of the predecessors from a legal standpoint.

I have asked the IRS and treasury representatives this question at the last Mid-Atlantic Benefits conference and they have said that this should not change the typical "stock deal" analysis. I have also flagged this issue in my cover letter for 5310 submission for a plan terminating prior to the merger and have gotten a favorable letter.

You may want to look at this:

http://benefitslink.com/modperl/qa.cgi?db=...ributions&id=78