partial distribution - distributable event

[Guest astonewall]

Small employer sponsors a DB plan that covers both union and nonunion employees. Small employer is bought out, and mega company immediately wants to terminate the DB plan. That is the modus operandi for all their acquisitions. However, the collective bargaining agreement prohibits mega from terminating the plan with respect to the union employees.

So, Mega wants to terminate the nonunion portion of the plan. Is there such a thing as terminating a portion of a DB plan? Mega knows it can do a spinoff and termination, but that will involve negotiations over how assets are allocated between plans ( original and spinoff).

If is clear that Mega can cease accruals for nonunion participants, and exclude them from coverage under the plan. But can it make a distribution to the nonunion participants because it has "terminated" their "portion" of the plan thereby creating a distributable event? No one's employment is being terminated.

There are good reasons not to terminate a plan now; there are good reasons to do the spinoff. However, the employer has good reasons for wanting to execute the termination of the nonunion portion of the plan and distribute assets. Any suggestions?

[Mike Preston]

Alan, nobody else has taken a crack at this, so I'll take a wild stab. It would seem to me that it is not possible to terminate a portion of a plan. To do so without considering it a multi-step transaction under 414(l) such as a spinoff followed by a temrination doesn't feel right to me.

I'm certainly not aware of any precedent.

However, if I were tasked with seeing whether this is something that could be done or not, I would call the PBGC and ask them whether they would allow such a termination. Their legal department is very responsive as to initial inquiries. Getting something in writing from them, however, sometimes takes quite a bit of time. In my experience, they are a bit gunshy of issuing letters that are theoretical, such as the old General Information Letters we used to be able to get from the IRS. Instead, again - in my experience, they gravitate towards specific advice. Of course, in order to do so they need the appropriate documentation (copies of plans, maybe collective bargaining agreements?).

Maybe somebody else has some direct experience that contradicts my gut feel.

[david rigby]

Mike's comments certainly echo my gut reaction as well. It is possible that the PBGC has already answered this question. My hunch is that they would be able to give an unequivocal answer.

On the outside chance that this is new ground, it seems likely that both the IRS and PBGC would prefer the spinoff route. Otherwise, it becomes very difficult to document how the assets are allocated.