Assume sponsorship and terminate?

[KateSmithPA]

Company B buys all assets of Company A. Both companies have 401(k) plans. Purchase was effective 3/1/2005.

Company B wants to assume sponsorship of Company A's plan and then terminate the plan. I don't know why Company A just doesn't terminate the plan, but this is the situation with which we have been presented. To further muddy the water, some of the employees of Company A have gone to work for Company B. They continued to have deferrals taken from their pay but the deferrals have been deposited to Company A's plan.

1. Is it okay for Company B to assume sponsorship of A's plan and then turn around and terminate it? If so, does this action have any impact on the A employees who have gone to work for B?

2. Does anything have to be done about the deposits to the A plan from wages of employees who now work for B?

[mbozek]

Q why not just merge A's plan in to B's plan and avoid termination? The assets of the A employee's working for B can be added to their accounts under the B plan.

[david rigby]

mbozek is slipping up. He usually will advise you (correctly) to seek review by ERISA counsel, in this case especially to make sure that plan A does not have some "operational taint" that B would not want to assume.

[E as in ERISA]

And I think that the attorney will want to look at some of the successor plan rules, etc. In an asset purchase, you usually want the plan to stay with the old employer in order to terminate it and make distributions without any issues. If Company B assumes sponsorship of Company A's plan and then terminates it, then I think that there could be problems in making distributions from A's plan to certain employees. Look at 401(k)(10)(A)(i) that allows distribution upon termination of the plan IF no other plan is established or maintained. Or (ii) on disposition of assets. The attorney will have to see how your facts, fit since it only appears "some" of the employees are now working for B. (But the bigger question would be why would B want to have anything to do with A's plan if A's employees weren't part of the deal?)

[KateSmithPA]

Thank you all for your replies. I agree it would be best for Company A to terminate the plan and distribute all balances. However, may Company A still terminate the plan even though the purchase of the company assets was months ago?

Or, did Company B, in effect, already assume sponsorship of the plan when they started depositing the deferrals of the former employees of Company A into the Company A plan?

[mbozek]

Does B's plan allow B to make contributions for B's employees to A's Plan? I dont see how the trustee for A's plan would knowingly accept contributions from an employer who has not adopted the plan and has not signed the trustee agreement. The company A workers who now work for B are B's employees and should participate in B's plan. The reason for recommending merger instaed of termination is that B will have the same risk in merging A's Plan that it would have in terminating A's plan since it would have to adopt the Plan in order to terminate it.

A can terminate the plan at any time if it is willing to pay for the cost of a termination.