Merging Plans of Parent/Subsidiary

[Guest jefe96]

I searched the board and sort of found an answer to my question but it didn't totally clear things up for me.

Company A buys Company B in early 2005 and creates a parent/subsidiary controlled group. Both companies have 401k Plans. The plan is to merge Plan B into Plan A effective 1/1/06 and have Company B employees begin participating in Plan as of that date. This means that a final valuation and 5500 filing will have to be done as of 12/31/05 for Plan B. From what I read, if the legal date of the merger is written to be 12/31/05, then that is when the assets are considered to be transferred to Plan A, correct? It is most likely a physical impossibility to value the assets and cut a check or wire all in the same day on 12/31. So, the assets will not physically transer until sometime in Jan. 2006. Obviously a black out notice will be issued to the affected participants. Am I understanding correctly then that on the final 5500 for Plan B for 2005 plan year that we would show a transfer out to Plan A of the value of the plan assets on 12/31? Even though the assets in Plan B don't physically transfer until maybe the middle of Jan 2006 is there a 5500 filing requirement for the 2006 plan year for Plan B? And if the answer is no, in what reg or cite is that communicated? I'm also guessing that any investment gains/losses for Plan B's assets prior to transfer in 2006 are just lumped together with Plan A?

[RCK]

Correct--the assets of Plan B do not have to be liquidated and transferred to Plan A's investment vehicle to be Plan A assets. I had a long and painful argument about this a year or so ago with several layers of auditors from a big audit firm. I finally convinced their national experts that this was the case.

In retrospect, I might send something to the holder of Plan B's assets, making it clear to them that effective 12/31/2005 Plan B no longer exists, so they are holding Plan A assets. This might help smooth the way for the auditors.

OR you could liquidate the assets prior to the merger date, so that they could actually transfer on the merger date. But you don't want to do it before the merger date.

[Kirk Maldonado]

RCK:

Last time I checked, auditors were in the business of preparing and examining financial statements, not the practice of law. Determining which plan the assets belong to seems to me to be a question of law, not of accounting precepts.

While your approach certainly simplifies things significantly, there are some problems under ERISA with it. I'm not sure that the Trustee of Plan A can somehow automatically become the trustee of some of the assets of Plan B were there is no contactual arrangement between the trustee of Plan A and the sponsor of Plan B. Also, my guess is that you would never be able to get the two trustees to formally agree to such an arrangement, because each trustee could become liable for the fiduciary breaches of the other.

Nevertheless, in most cases, I'm sure that you could implement your approach with no problems whatsoever. But if problems did arise, I think it would be hard to reconcile your approach with the literal terms of ERISA.

[Locust]

I am not comfortable with the "effective as of" approach to asset transfers and recommend against it. I don't think it meets ERISA trust/5500 requirements.

Assets are either transferred, or they are not. If they are not transferred, the original trustee still owns the assets and is responsible for investments, expenditures, the transfer, and accounting for those assets. How would you report the assets - as a payable in the old plan and a receivable in the other? If the "effective as of" approach were allowed, you'd have a black hole where no one was responsible for the assets.

What is the problem with continuing the original plan until actual transfer? Is it just the 5500? That's not that big a deal, and easier and more straightforward than the contortions (fictions?) required for the "effective as of" approach. Is it the auditor's report? If the last plan year is short (7 months or less I believe), you have the option to combine the audits. Is it the participants? Can you tell them that the assets have been transferred when they really haven't been - that would seem to be a problem.

[E as in ERISA]

That's the legal issue: the sufficiency of the trust language. It's pretty easy to amend the plan to say it is merged effective 12/31/2005. But from the DOL's perspective, it's also important that the trust document accurately reflect that the new trustee has legal ownership of the assets of that date (even though they are still in custody of the prior trustee). From my experience, that is not always done well. And that is where the auditors get caught in the middle. They know that there may be a concern that the merger hasn't legally taken place on 12/31/2005 if the trust documents aren't adequately updated. And the attorneys will tell them that the legal transfer has occurred. But the attorneys won't put that opinion into writing. And that is a problem. Now the auditors have to issue an opinion stating whether the assets do or don't belong to the plan at that date, but insufficient documentation to support that opinion.