Spin-Off Termination of Portions of 403(b) and 401(k) Covering Former Employees?

[Übernerd]

Employer sponsors two plans: a 401(k) and a 403(b) plan (it also sponsors a cash balance plan, which is in the process of terminating). Assets in the 403(b) plan are held in insurance company annuity contracts (investment vehicles, rather than individual contracts) and in mutual funds. Following an asset sale, over 90% of the participants in the two DC plans no longer work for Employer, but remain participants in the plans.

Employer’s stated goal is to spin off and terminate those portions of the DC plans covering inactive participants (i.e., those no longer employed by Employer). Employer wants to keep both plans for its remaining employees. Is there any way to get there?

I haven’t been able to track down anything that sounds like a “spin-off” termination of those portions of the plans Employer would like to get rid of. As I understand it, under current law, plan termination is a distributable event for purposes of the 401(k), but not the 403(b). Under the new proposed 403(b) Regs, the 403(b) plan could terminate and distribute its assets, but Employer could not maintain another 403(b) plan for 12 months. None of that really speaks to terminating only a portion of the plans--though it might be worth considering whether the remaining "stumps" of the plans would be considered "successor" plans.

But, as I see it, even if Employer could distribute the 403(b) account balances on plan termination, it couldn’t force participants to take their money out of either plan (unless a spin-off termination is possible).

If Employer’s first choice is impossible (which seems likely), it would like to flush as many inactive participant accounts out of the plans as possible. One proposed method of doing that is to give participants the option of rolling their plan accounts into Individual Retirement Annuities with the same distribution options as the plans. The insurance company that issued the annuity contracts under the 403(b) plan is willing to forgive surrender penalties on the annuity contracts if Employer makes its IRAs the default option for the transferred assets. Is this the best that they can do (assuming even this much is possible)?

Sorry this sounds like a law-school exam question (or an example from the Regs). Maybe I should have started with “Once upon a time . . .”

Thanks for any ideas.

[Übernerd]

Typing this out helped me organize my thoughts. I think the best way of stating what Employer wants (and might be able to get) is to divest itself of its fiduciary obligations with respect to inactive participants, without those "force-outs" constituting distributions for purposes of §§ 401(k) or 403(b). I.e., it wants the effect of a termination would have on its ERISA obligations, without (1) triggering distributions for IRC purposes or (2) jeopardizing its ability to continue the plans for active employees.

So, would purchasing irrevocable commitments (the IRAs) do that? Ins. co. assumes fiduciary obligations with respect to the inactive participants (effectively removing them from the plan), but there has been no distribution to the participant under either 401(k) or 403(b).