Asset acquisition

[fiona1]

Company A (which has a 401k plan) is potentially going to be purchased (asset purchase) by a company that does not currently have a 401k plan. This purchase will happen very quickly. Is there a legal way to allow the employees to continue to defer into this plan after the purchase while they are working on starting up a brand new plan for the purchasing company? The purchasing company does not want to take over the plan as is, they want to terminate and roll the assets to a new plan. Any thoughts?

[Laura Harrington]

If 100% of the assets of Company A (including the employees) are purchased, Company A technically no longer exists. The exclusive benefit rule says that the plan must be established for the exclusive benefit of the employees of the employer. Since the employer that sponsors the plan no longer exists, there can be no employees of that employer, so no deferrals can be made to the plan.

The only option is for the purchasing company to become the successor plan sponsor of Company A's 401(k) plan, which, as you have already stated, they do not want to do.

[fiona1]

Interesting. Thanks for the reply. What is involved in becoming the successor plan sponsor? So the purchasing company can just say "Hey, we decide we do not want to be a successor plan sponsor" and therefore no more deferrals can be made? Is becoming a successor plan sponsor an election the purchasing company can make?

Say the acquistion occurs on 7/31/08 - and that the purchasing company will sponsor a new plan effective 1/1/09. Can they decide to become a successor plan sponsor of the acquired plan, allow the participants to continue to defer, and then terminate it effective 12/31/08?

[Laura Harrington]

In an asset acquisition, the seller retains responsibility for any benefit plans unless the purchasing employer explicitly agrees to become the succesor plan sponsor. So unless the purchasing employer agrees to be the sucessor plan sponsr, the deferrals would have to stop. If the purchasing employer agrees to become the sucessor plan sponsor, they would need to speak with the attorney drafting the acquisition paperwork to ensure this issue is handled properly.

The attorney is likely to talk them out of becoming the successor plan sponsor because of fiduciary concerns over the administration of the plan prior to the date the new employer becomes succesor plan sponsor.

If they did become the sucessor plan sponsor of Company A's existing 401(k) plan the purchasing employer cannot terminate that plan 12/31/2008 and setup a new plan effective 1/1/2009 because of the successor plan rule.

I don't see any reason why they would need to setup a new plan effective 1/1/2009. They could just continue sponsoring the prior plan...if they become sucessor plan sponsor, it is their plan; no reason to get rid of it. If they absolutely insisted on setting up a new plan, then I would merge the old plan into the new plan.

[fiona1]

Thanks so much...

[fiona1]

Another quick question for Laura (or anyone) - does the current company have rules about notice to employees and how early that has to go out?