Controlled Group/Multiple ER Group - SH Spinoff

[Tinman]

I have 2 401(k) plans (A & B). Each plan is a plan of a controlled group. The both A & B have companies that are minimally related but not enough common ownership to be a part of an overall controlled group.

One company within Plan A wants to separate from the group and start their own safe harbor 401(k) plan effective 1/1/2009. Any thoughts on this? Pitfalls? Potential problems?

[buckaroo]

My apologies, but I am having some trouble understanding your post. Are you saying that there are two 401(k) plans for a control group. And that there is a company which participates in the plan? So, are you saying that Plan A is a multiple employer plan? (Companies participating in plan A are unrelated?)

[J Simmons]

Building on Buckaroo's comment, the company separating from the group that has Plan A and starting that company's own 401k safe harbor effective 1/1/2009 as a single-employer plan might be simplifying its plan situation.

The employees of the company would not have a distribution triggering event as to Plan A benefits because the company is sponsoring another 401k plan for those employees without a 12 month break in 401k offerings to those employees. So those benefits will remain with Plan A, unless they are spun off to the new 401k safe harbor plan as part of a trustee-to-trustee transfer.

If no spin off but loans or hardships are allowed under Plan A, there would need to be coordination between the new 401k safe harbor plan and Plan A, to properly enforce the overall limits on loans and the 6-month prohibition on elective deferrals following hardship payouts. That's because the benefits in Plan A were accrued while it was a plan of which the company offered to its employees.