control group and distribution events

[Guest insurancelaw]

I have a client that has a qualified 401 K plan and they are a non-for-profit organization. They have invested 85% into a new for profit enterprise and are going to begin new operations in that enterprise. More than 700 employees are being laid off from the first company and 50 or so are being offered employment in the new company.

Because this is a massive lay-off, they are fully vesting all participants in the current 401 k plan. However, the 50 or so employees are being told that they are fully vested in the existing plan, they are being told that they can not "roll-over" their accounts to a "roll-over" IRA or take a distribution as this is a "control-group". They are also being told that they can no longer contribute to the old plan.

This does not sound correct to me. I think that this is a distribution event and that they must be allowed to participate in the exisiting plan or that the new company must set up a new plan that mimicks the existing plan or they must set-up a Multiple EMployer Plan.

Please help. Thank you.

[QDROphile]

Transfer to another member of a controlled group is not a termination of employement for distribution purposes. No one has a right to continued participation in a plan. The sponsor can define eligibility as it chooses as long as the plan passes coverage and discrimination tests.

[Guest insurancelaw]

How Long would the 50 or so employees have to be unemployed by the parent company to be eligible for this to be a distribution event?

[WDIK]

Permanently. (At least that should be the intention with respect to being eligible for a distribution)

http://benefitslink.com/boards/index.php?showtopic=32732

[Guest insurancelaw]

I don't think the plan will pass discrimination tests. So, the new employees will have to be allowed to participate. Who bears the cost of the match? The parent of the subsidiary?

Thanks again for your help.