Employer contributions for forfeited amounts

[Miner88]

If a company, as part of a divestiture, is terminating employees who are just shy of vesting in their pension and/or 401(k) plans, can the buyer make a one-time contribution to the new employee's 401(k) accounts in the buyer's plan to make up for the present value of the forfeited benefits? What issues need to be considered?

[rcline46]

Watch out for a Partial Termination which would make the affected employees 100% vested. This could also be done by a plan amendment.

[Miner88]

Thanks for the reply rcline46. There will be far less than 20% of the participants being terminated, so I don't think there will be a partial termination. I was wondering if there were issues with giving just the new employees contributions (and differing amounts among that group itself) and not the existing participants in the buyer's plan. Also, aren't there limits as to the amount that an employer can contribute during a plan year or that a participant can receive - would these limits apply in this case?

[Bird]

You might consider a spinoff of the accounts of those participants - transfer the entire balances, including non-vested amounts, from the old plan to the new plan.

You might also be able to do what you suggest - make special contributions - but it would require an amendment and then contributions would be subject to the general test (as well as 415, 402(g)).

[Miner88]

Thank you Bird!

[rcline46]

We are, as usual, short information. So I will posit (make up) the missing information. Miner88 you can make corrections as necessary.

Sub X is being sold by Co. A to Co. M. The employees in Sub X participate in a plan of Co. A. Those employees of Sub X will now participate in a plan of Co. M. We will POSIT the plans are of the same type.

Co. A could make all employees of Sub X 100% vested, and if a real grinch, add the increase in vested balances to the purchase price being paid by Co. M. Problem solved providing the amendment is non-discriminatory. Note that if the plans are of the same type and the document so privides, the accounts COULD be moved with a trustee to trustee transfer.

Co. A is a real grinch and won't make the employees of Sub X 100% vested. Also, a trustee to trustee transfer or spinoff/merger will not happen. Always with an eye to the discrimination rules and the 415 limits, Co. M can make a contribution of restore the balances of those who rollover their distributions as Bird indicates.

[jpod]

Suppose (a) Company A is not a grinch, (b) an amendment to fully vest the employees WOULD BE a discrimination problem, or at least a potential discrimination problem, and © the buyer will not accept a plan-to-plan transfer. Can you do a spin-off termination of a piece of the plan attributable to the employees subject to the divestiture, thereby requiring full vesting as a matter of law, without the same discrimination problems?

[Bird]

I'm not sure what a "spin-off termination" is but I guess you're saying that these participants would be spun off into a temporary plan which is then terminated? Sounds like a lot of trouble and I don't think it gets around the (assumed) discrimination issue.

[jpod]

Bird, I would be interested to know what provision(s) of the Code and/or regulations suggests to you that you still might have the same nondiscrimination issues. But putting that aside, what if the spin-off termination was done in reverse? i.e., Company A spins off the piece of the plan that will remain in existence, and then the "old" plan that covers only the employees subject to the divestiture is terminated.

[Bird]

If I understand the concept, company A spins off a new plan that it sponsors, then terminates it. If you're doing any kind of nondiscrimination testing for company A, wouldn't you have to look at both plans when you do it?

I'm not sure, if you vest employees who are already terminated, how you run that testing, and whether it really could be a problem, so I am just going off the top of my head. But it just seems unlikely that if you couldn't vest a group of employees because of discrimination problems, that you could get around it by carving them into a separate plan and then effectively doing the same thing.