Change in Plan Sponsor?

[Guest moltengater]

Owner A and Owner B each own 50% of corporation X (a c-corp). Company X has a 401(k) plan with a calendar plan year. As of 04-30-2005 A & B go their own way and dissolve company X.

Owner B starts his own company and wants to take over the X 401(k) plan that he was in and continue contributions etc. for the employees of X who went to work for him.

Is it okay to amend the ABC plan to list a new employer with new EIN and just continue the plan showing a change in sponsorship of the plan on the 12-31-2005 form 5500? Is it to late to do this amendment now? Does X have to terminate the plan and Owner B start his own plan and roll over to his own plan?

[Guest TGeer]

There's no simple answer here.

One option-First, have X consent to the plan's adoption by Newco. Second, have Newco adopt the plan with appropriate modifications, such as changing the name, appointing administrator, etc. Make sure consent and adoption cover withholdings not yet paid over. Third, answer Q. 4 on 5500. Assuming normal rules for eligibility (no nonstatutory exclusions from coverage), discrimination should not be an issue. However, the ADP/ACP tests are more difficult to apply if the plan has a single plan year.

Second-Consider running the tests for the X-sponsored period, then if the plan is failing the tests use a short plan year ending on the date Newco takes over; this prevents bad test results from X-sponsored periods from spilling over to the Newco period. Of course, the Newco plan year could also result in a test failure.

Third-Note that the decreased coverage could result in a partial termination, and vesting for ongoing X employees. To avoid that result, structure the deal as a plan spinoff; that has the added advantage of leaving the short period testing and correction with X.

Last-You get to wonder whether the Newco plan or the X plan is "the plan" for purposes of reporting the pre-splitoff information. Clearly, the new plan has to take pre-transaction service into account, since the X is a predecessor employer.

This is intended to give some thoughts on questions to address. You should get a competent advisor to go through the process, with the facts, with A or B. It would be hard to be an advisor to both, because of conflicts of interest.