Subsidiary & spinoff

[R. Butler]

Company B was a wholly owned subsudiary of Company A. On 07/31 Company B is sold to one of the employees in a stock sale. Prior to the sale Company A sponsored a 401(k) plan, Company had also adopted that plan. The buyer of Co. B contacted us yesterday & wants to spin-off the assets into a new plan sponsored by B. Company A's position is that since the new plan was not effective as of the date of sale, the assets cannot be transferred & that there is a distributable event. Ideally these issues should be decided prior to the sale, but I'm not so sure I'd go as far as Company A's position. I've researched & I just can't find anything definitive enough to satisfy me.

Thanks in advance for any guidance.

[jpod]

If Company A's plan was amended after EGTRRA to make "severance from employment" a distributable event, as opposed to the old "separation from service" standard, I believe that Company A's position is the correct one (assuming that A and B are not somehow members of a 414 group). A severance from employment occured immediately upon the closing of the stock purchase deal, so presumably employees of B now have a plan-given right to distributions which you cannot override via a plan to plan transfer.

[R. Butler]

One more thought, I haven't seen Co. A's document, but it could contain language allowing Co. B to continue to be a participating employer through the 410(b)(6)© transition period. If that is the case is it reasonable that Co. B could adopt a plan at any time during the transition period & then spin the assets into the new plan?

[jpod]

I made the assumption that Company B dropped out of the plan immediately following closing because Company A says there was a distributable event, but I suppose I should not have made that assumption. If appropriate resolutions were not adopted to kick Company B out of the Plan, and if the Plan permits participation by a non-414-related employer, then there has been no distributable event and you're ok to do a direct spin-off or plan to plan transfer.

[QDROphile]

Plan A can spin off a portion of the plan to become the plan of B or to merge with the plan of B. Whether or not the acquisition allows participants to elect a distribution has no effect except that participants may be able to decide whether to go for the ride to B's plan or take the benefits under A's plan to manage themselves. A is not compelled to engage in the spin off.

[Guest Harry O]

A well drafted stock purchase agreement would have addressed the treatment of the plan.