One big plan with many divisions now has to have one of the divisions separated into its own plan. Need help.

[Guest DIGMYDOG]

We've had this big 401(k) where there are many divisions. There's the headquarters division, about 20 facilities, and then a pharmacy. When we first set up the plan, about twelve years ago, the attorney advised that all of these "divisions" needed to be in one plan and tested as one plan.

We just found out last month that as of the middle of 2003 the ownership has changed so that the pharmacy should not be part of this plan. The attorney has advised that we should pull the pharmacy employees out of the big plan and set up a separate plan for them.

The original "big" plan is a 401(k) only plan (no PS or match has ever been contributed) and it is a calendar plan.

The pharmacy employer wants the new plan to be a 6/30 fiscal year plan (effective date of plan 7/01/03).

What is the best way to proceed with separating the assets of both plans. All the assets are in pooled/separate accounts with one financial institution and the new plan will continue to use the same financial institution, same investments. Do we simply write a letter of instruction to the financial institution requesting that the assets of the pharmacy division be transferred to the new contract? Of course we will have to tell them to take the contributions (and earnings) made for July 2003 and after, out of the old plan and show those contribution as being made to the new plan. Or is this even possible to do after the fact. Are there any other implications we need to think about?

One huge question is...how do we report this on the 5500? It's confusing because the "big" plan is a calendar year plan while the pharmacy plan is going to be a 6/30 plan year.

Also, how would we run adp testing for 12/31/2003 for the "big" plan?

Any advise or suggestions are so appreciated.

Thank you.

[Guest eafredel]

This may involve a transfer of plan assets and liabilities for the participants who are pharmacy employees (and, perhaps, former pharmacy employees) from the "big" plan to a new plan solely for pharmacy employees. Since all of the contributions to the plan are 401(k) contributions, all contributions are fully vested. Since the financial institution/investments of the "new pharmacy" plan are not changing, the actual transfer of assets and related recordkeeping also should be simple. However, you will want to get moving so everything can be resolved by year end.

To start, you will need to see whether the corporate documents that resulted in the change of ownership addressed the treatment of employee benefits, including the 401(k) plan. These documents may provide some specific directions about each party's responsibilities.

Second, you need to look at the terms of the "big" plan's 401(k) plan document to determine what that document says about transfers of assets and liabilities.

Third, you need to determine whether the "spin-off" of the pharmacy employees might cause a partial termination of the "big" plan.

For purposes of the "big" plan's 2003 Form 5500, you probably will need to report that the assets and liabilities related to the pharmacy employees were transferred.

You should ask the attorney whether the "big" plan is intended to be a multiple employer plan with commingled investments or whether it is the intent of the parties that separate plans and trusts be established.

[MWeddell]

Also, you might question why bother to change the plan year for the pharmacy's plan. Because the 402(g) limit is always a calendar year limit and because most payrolls report information more readily on a calendar year basis, I don't see why they'd care what the plan year is. Under today's plan design, there are no discretionary employer contributions where they first want to see year-end financials before deciding how much to contribute.