Bankrupt client buyout and 401(k) plan

[Guest Judy S]

I have 2 clients-both declared bankruptcy in January 2005. Both companies were then purchased by another company effective March 1 in an asset only sale. The companies had an affiliation but were not in a controlled group. Both maintained separate 401(k) plans.

Company #1 is top heavy. For 2004, the 2 key employees had deferrals and match. These are the only contributions to the plan. The match for other employees was not enough to cover the required top heavy minimum, so an additional contribution of about $4,000 is required. I suggested that the 2 key employees be refunded their 2004 and 2005 deferrals and forfeit their match so that no top heavy minimum would be required for 2004 or 2005. The bankruptcy attorney said their is no money to make the top heavy contribution and endorsed that solution, but, surprise, surprise, the 2 key employees were not happy about it. Can anyone think of another solution? The plan has fewer than 10 participants and the goal is to terminate the plan ASAP.

Company #2 is not top heavy. The plan contributions are deferrals only. The new company has said that they can continue to maintain the 401(k) plan, but the cost to the new company must be $0. The new company has not formally agreed to assume sponsorship at this point, but their formal approval is being sought. The matter should be resolved in the next month or so. Apparently, the fate of the plan was not a part of the purchase agreement. My question-should deferrals continue to be withheld from employees while the plan is in limbo? What are the possible ramifications if the new company decides to terminate the plan? What else should I be considering in a situation like this? I have not dealt much with bankruptcies and am interested in learning what to look out for.

[Kirk Maldonado]

Judy S:

Company #1. If I were counsel to that employer, I would give the employer language that they could say to the Key Employess about what to do with their grievances, but I couldn't post it in a public forum.

The more tactful approach would be to say to them that you'd be happy to let them keep their money in the plan, if those employees will reimburse the employer for the cost of the top-heavy contribution (for the other employees).

Company #2. I think I possibly have spotted a deal-killer issue, which may make your question moot. If the employer will only assume sponsorship of the plan assuming it has no risk of being out of pocket any money, who would assume the responsibility for making any top-heavy contributions that would be required if he plan becomes top-heavy (or the safe harbor contributions designed to avoid top-heavy statusJ)?

I want to add a big caveat here. It's late and I'm very tired, so my reasoning in this post may be faulty. Please think this through carefully to make sure that what I said is correct.

[GBurns]

Why would the employees and the plans be transferred to the purchaser if this is an asset only sale rather than a stock sale?

[Guest Judy S]

Regarding Plan #1-the resolution of the top heavy issue is now being negotiated between the key employees and the majority owner who is also acting as the attorney in the bankruptcy. I'm waiting to hear about the outcome.

Regarding Plan #2-the plan was unfortunately not addressed in the purchase agreement. The new owner has simply stated that they can have their plan if they want, but the new owner must have zero cost. I personally don't see how that is possible, since document restatements, for instance, must be paid for by the sponsor-at least that is my understanding. I guess the documents can be furnished for "free", and the cost rolled into the annual admin fees.

Plan #2 is a deferral only plan, and I don't think there will be any key employees since there is no ownership, direct or indirect, among the employees and pays are not high enough to catch an officer.

There just seem to be a lot of things to think about here and I haven't had enough experience with bankruptcies to feel comfortable with this whole situation. Perhaps by the time I learn enough to feel more comfortable, the new owner will close the company down, take their assets and run. Seems fairly likely actually.