Severance from Employment

[Guest CharlieLaur]

The stock of Corporation A was purchased by Corporation B earlier in 2008. Corporation A is being maintained as a wholly-owned subsidiary of Corporation B. The employees of Corporation A are continuing on the payroll of Corporation A.

Corporation A currently sponsors a 401(k) Plan. As of January 1, 2009, it is expected that Corporation A will adopt the 401(k) Plan established by Corporation B which currently covers the employees of Corporation B and the employees of the other wholly-owned subsidiaries of Corporation B.

Have the employees of Corporation A had a “severance from employment”? Based upon my reading, I would say “No”.

If there has not been a “severance from employment”, what are the options for the Corporation A 401(k) Plan?

(A) Merge the plan into the Corporation B 401(k) Plan?

(B) Freeze the plan and make distributions when the participants incur a distributable event (age 59.5, termination of employment, etc…)?

© If the plan is terminated, am I correct that the part of the account balances attributable to salary deferrals (including safe harbor & QNEC’s) cannot be distributed until a distributable vent occurs (same as in B above)?

Other???

Thanks for your input -- I am hoping for an alternative that is better than what I have currently discovered since each of them has a negative aspect for the current plan participants or for Corporation A.

[JanetM]

They have not had severance from employment.

Best option is A - transfer assets to Bs plan. This would include loans. This eliminates the problem of employee continuing loans payments and facing default. This will reduce expenses incurred from having two plans - record keeping, audit, ect. This will also keep money accessible for hardship and loan.

Forget the idea of distributions now or later. This only encourages participants to make ill formed decision. Don't see negative aspect to transfer of funds to new plan.

IMHO the only one who would see this as negative is participant who wants distribution so they can spend it or financial advisor hoping to make big fees on someones rollover account.

[Guest Sieve]

I agree with Janet, both that there is no severance from employment and, generally, merging of the plans is the best future course of action. There is at least one downside to merging, however: the new merged plan may become subject to an audit requirement, so that keeping the plans separate (if they meet minimum coverage) might therefore save untold $X,000 in audit costs. Even identical plans can be maintained separately by an employer for different groups of employees and they are not aggregated to determine if they are subject to audit--each plan stands on its own for that purpose.

[Guest CharlieLaur]

Thanks JanetM and Sieve for your quick responses and confirmations of my own thoughts.

The "negative" aspect to the merger of the two plans is the issue that the current plan for Corporation A allows the participants to purchase any "normal" investments that they choose including individual stocks, bonds, mutual funds, etc... whereas the plan for Parent Corporation B only allows for investment in a limited selection of mutual funds chosen by the Plan Administrator/Trustee. In order to merge Plan A into Plan B, the current accounts would need to be liquidated and the accounts transferred in cash. Many of the participants have portfolios that they are reluctant to liquidate. The client is trying to find a solution that makes everyone happy.

[Guest Sieve]

Remember, Charlie, that you don't have to hurry this plan merger process. You get a free pass from Section 410(b) testing until the end of the plan year following the plan year of the acquisition/merger, as long as the plans don't change substantially during that time period.

[K2retire]

The "negative" aspect to the merger of the two plans is the issue that the current plan for Corporation A allows the participants to purchase any "normal" investments that they choose including individual stocks, bonds, mutual funds, etc... whereas the plan for Parent Corporation B only allows for investment in a limited selection of mutual funds chosen by the Plan Administrator/Trustee. In order to merge Plan A into Plan B, the current accounts would need to be liquidated and the accounts transferred in cash. Many of the participants have portfolios that they are reluctant to liquidate. The client is trying to find a solution that makes everyone happy.

Perhaps in conjunction with the merger it is time to rethink the Plan B investment options. That would likely be less expensive than maintaining two plans.

As for participant reluctance to liquidate, it is really the trustee's decision not theirs. After all the trustee is the one charged with making prudent investment choices for the plan, despite the current participant belief that they always have the right to their own investment selections.

[Guest Sieve]

K2 - While you are absolutely correct, Charlie and the client clearly are taking into account employee relationship issues--i.e., how to keep employees reasonably happy in light of competing interests--which, to my way of thinking, is a generally laudable approach. When changes occur in a retirement plan, or in any highly visible benefit program, the approach I recommend to my clients is different from the approach I recommend when the benefit is being provided anew. In the instance of change, you ought to consider the benefit's inertia which has accumulated over time and should not make a decision without giving it sufficient thought and, if necessary and appropriate, sufficient advance communication and "buy-in" by employees. This may seem like a "soft" approach to many, but it goes a long way towards muting employee complaints when very important and difficult choices must be made later on. Thus, my suggestion to give it time, before jumping into a plan merger, to fully consider the consequences and properly prepare for the switch-over--that's certainly one consideration of the IRS in the free-ride transition period reg. under IRC Section 410(b).

Thus endeth the lesson . . .