KSOP and Corporate Spinoff

[Scott]

I gave this a go on the 401(k) board, but no responses, so I'll try here:

Company A maintains a KSOP for itself and its subsidiary, Company B. Participants can direct the investment of their deferrals among several investment funds, including Company A stock. Company matching contributions are initially invested in Company A stock, but participants can redirect those contributions into any other fund.

The company is about to spinoff Company B, which will be an S Corp. After the spinoff, the account of every participant in the plan who is invested in Company A stock will hold shares of Company A and Company B stock. Because Company B stock will no longer be employer securities, and because Company B stock will subject the plan to UBIT, Company A plans to close Company B stock as an investment fund and prohibit plan participants from investing any future contributions in that stock and, over time, the plan will attempt to get rid of its Company B stock. However, it may take a while because of the limited market for Company B stock.

One idea that is being contemplated is for Company B to establish an ESOP, to which the accounts in Company A's plan of the Company B employees will be transferred. As a result of the transfer, both plans will hold stock of both companies. The two plans would then do a "stock swap" (i.e., Company A's plan exchanges Company B stock with Company B's plan for Company A stock of equal value). After the swap, the Company B plan would hold only Company B stock, while the Company A plan would still hold some shares of Company B stock, but fewer than it did before the swap.

A few questions:

1. Because participants have the right to direct their investments, can Company A unilaterally do the stock swap and replace shares of Company B stock in participants' accounts with Company A stock?

2. A similar question with respect to Company B stock remaining in Company A's plan after the stock swap (or all Company B stock if the swap does not occur). Does the participants' right to direct investments impact the ability of the plan to sell Company B stock over time?

I realize that an investment fund is not a protected benefit and a plan sponsor can eliminate a fund whenever it deems it necessary, but in most cases, the fund being replaced is a mutual fund, and the replacement can be done on a single day. Just curious as to how the gradual phase-out of Company B stock can/should be done.

Any thoughts?

[BeckyMiller]

Pretty technical question for this database, not the kind that folks would typically just chime in on. That is probably why you haven't received a response.

Let me say that I have worked on similar situations. The plan sponsor and the plan need competent counsel both for securities issues and for ERISA issues. It is going to be an expensive procedure in any event.

FYI - I am not an attorney.