Continuance of deferrals after sale of employer

[Guest philc]

401(k) plan for a controlled group of several auto dealerships - EmployerA/Plan A. One of the auto dealerships was purchased by an individual (lock, stock and cars) from Employer A, creating Employer B.

After the purchase Employer B continued to take out deferrals from employees (previously participants in Plan A) for aprox. 1 month. Employer A/Plan A refused to take those deferrals and not willing to allow Employer B in their plan. Employer B has not yet established their own 401(k).

Shouldn't the deferrals (and earnings) taken from Employer B's employees be returned to them, since Employer B has no plan which even allows these employees to make deferrals? All of this has happended so far in 2005. Any alternatives?

[alanm]

Return the deferrals

[JanetM]

Give deferrals back and quickly set up plan. Employees can not make deferrals to a plan until one has been adopted and set up. The sooner you get it going the sooner the employees will be happy.

[RCK]

I'd add that deferral elections made under plan A are not valid for plan B.

There's probably an interesting question here: can you have a prohibited transaction here for failure to submit the contributions in a timely manner to the plan, if there is no plan?

RCK

[david rigby]

Others may disagree, but I suggest you process a negative deferral in your payroll system, and let the payroll system take care of the tax withholding issues.