Establishment of a successor plan

[Guest JBeck]

Company A and company B both maintain 401(k) plans. Company B wants to buy company A but will continue to keep company B in existance. The regs say that salary deferral assets can't be distributed from company A's plan if company A maintains a successor plan. In this case the successor plan is company B's plan. But the regs also say that the company B and company A are not part of the same controlled group for the purpose of determining if there is a successor plan if company A's plan is terminated prior to the date of the acqusition. Can company A's plan be terminated prior to the date of the acquisition and all assets be distributed, even though company A will be a participating employer in Company B's plan after the acqusition?

[JanetM]

This one can be tricky. If B is not buying A in stock deal, A can termimate and distribute assets before the deal goes through. Just remember you have to vest everyone 100%.

If B buys assets and doesn't assume A's plan than A can terminate. If B assumes A's plan then successor rules apply.

[austin3515]

So if this is a stock deal, A can still terminate the Plan before acquisition, and allow distributions? I think you just responded to an asset deal. I'm curious if your opinion changes if it's a stock deal. It sounds like it wouldn't, but hey ya never know!

[JanetM]

I don't see where in the post you get asset deal austin.... maybe I am just dull and thick today.

[Guest Midas]

Sal seems to support Janet.

2a speaks to a stock acquisition.

2b speaks to an asset sale

Chapter 15: Tables, Checklists, and Quick Reference Guides -

Section VII (Mergers, spin-offs, and transfers): Part A (Definitions)

2.a.1) Plan issues. By virtue of an acquisition of ownership (e.g., stock), the buyer

automatically assumes the seller’s plan. In the first example above, X assumes the responsibilities of any plan maintained by the newly acquired subsidiary (Y). In the second example above, Jason, as the new 100% owner of Z, assumes the responsibilities of Z’s plan. In addition, after the transactions described in the first two examples, the companies involved are now members of a controlled group which may assume joint and several liability with respect to certain plan liabilities.

These issues are addressed later in these materials. In the third example above, the partnership is now part of an affiliated service group with five other companies, and any plan continued by the separate professional corporations are now plans maintained within that new affiliated service group.

2.a.1)a) Negotiation. Because of the related group liabilities resulting from the above transactions, the buyer may negotiate with the seller to have the selling company terminate its plan before the acquisition. Usually a termination before the company transaction will be necessary to eliminate (or minimize) potential liabilities to the seller (or to the new related group members).

2.a.1)b) Less flexibility when addressed after the transaction. If the employee benefit plan issues are addressed after the transaction closes, there may be less flexibility in dealing with certain issues, including the distribution of benefits with respect to the plan maintained by the acquired company, the funding of benefits accrued prior to the transaction, and the crediting of service earned prior to the transaction. These issues are addressed later in these materials.

2.b.1) Plan issues. When there is a complete asset sale, the seller remains responsible for the plan unless the parties in the company transaction negotiate otherwise. There are the following possibilities.

2.b.1)a) Seller might terminate its plan. This may trigger certain liabilities, distribution issues, and other issues that are considered in these materials. When there is a complete asset sale, the seller’s plan will usually terminate unless the buyer agrees to sponsor the plan. If the buyer maintains a plan, but does not assume sponsorship of the seller’s plan, the buyer must decide whether its plan will credit the acquired employees with their service with the seller, and

whether (and, if so, when) the acquired employees will be eligible for its plan.

2.b.1)b) Seller might continue the plan. The seller might decide to continue the plan, at least during the period that the seller “winds up” its business. Issues here include the disposition of the benefits held for the employees who no longer work for the seller because of the sale, whether distribution is available with respect to those benefits, whether a partial termination has occurred for vesting purposes. These issues are addressed later in the materials.

2.b.1)c) Buyer might continue seller’s plan. The buyer might agree to continue the seller’s plan with respect to the employees now working for the buyer because of the company transaction. If all, or substantially all of the seller’s employees now work for the buyer, the buyer might simply adopt the plan as a successor sponsor, or merge the entire plan into its plan. This triggers a number of issues with respect to the plan continued by the buyer, including the crediting of service with the seller under the buyer’s plan, the protection of optional forms of benefit if plans are merged, and liabilities assumed by the buyer. These issues are addressed later

in the materials.

[austin3515]

Janet -

A dull and thick day for you is still a pretty damn good day... I was confused, but after Midas' post I'm straight again (thank goodness).

[JanetM]

austin (don't take offense) but I call it a blonde moment. I figure blonde is fleeting, senior is forever.........................

[austin3515]

None taken