Company selling fully owned subsidiary

[Guest Scrappy]

If an employer A sells fully owned subsidiary M during the plan year, is there a grace period where the subsidiary M's employees can continue participating in employer A's 401(k) plan?

[JanetM]

No there is not. You could have amended the plan to be multiple employer plan for short period of time. That way the new owner could have opted to participate in the plan until they set up their own.

[Guest Scrappy]

I thought that if a company sold a wholly owned subsidiary, that there was a transition period, up to 12 months, where the entity could still be treated as a controlled group?

[E as in ERISA]

It's just a coverage testing rule -- that essentially allows you to skip coverage testing for a year after a transaction -- in order to give you time to re-design the plan as necessary to pass coverage.

[Guest Scrappy]

I thought 410(b)(6)© gives a free pass for both participation and coverage requirements. Wouldn't that allow the employees of Company B to still continue to participate in Company A's plan during the transition period?

[E as in ERISA]

Not automatically. 410(b)(6)© doesn't change plan terms. It just fixes demographic problems, not problems with plan terms.

If the plan says that it covers all companies in the controlled group and M leaves the controlled group, then M's employees should no longer be part of the plan. All that 410(b)(6)© would do in that situation is to give M a free pass on coverage if M can't pass on its own following the disposition. It doesn't automatically allow M's employees to continue to participate. You would have had to amend the plan to include M if you wanted the employees in.

But if the plan says that it covers A's and M's employees, then it might now be a multiple employer plan and M's employees might still be covered.

[Guest Scrappy]

Company A has several wholly owned subsidiaries. Each subsidiary has signed on as participating employer to Company A's plan.

Company M is sold during the year. If Company M employees continue to participate in Company A's plan, you are saying that it turns the plan into a multiple employer plan. But, under the transition rules, can the plan still be tested as if this were still a controlled group versus testing as a multiple employer plan?

And if Company M did establish a plan at the sale, could both plans be combined for testing purposes? And would this include all testing ... coverage and ADP/ACP?

[E as in ERISA]

In a multiple employer plan, you perform coverage testing at the employer level -- not plan level.

Under the transition rule, you're basically deemed to pass if you passed before the acquisition or disposition.