Plan Termination In Anticipation of Merger

[Guest djsimonetti]

Client with 401(k) plan will merge into another employer with its own 401(k) plan. Client's employees prefer not to merge plans since investment funds available under survivor's plan are unattractive. I am considering terminating client's plan and making distributions before merger. However, Reg 1.401(k)-1 (d)(3) appears to prohibit this since the employer (ie, the survivor) would maintain a successor DC plan (ie, the survivor's 401(k) plan) within 12 months after termination. Any ideas? The reg doesn't seem to make much sense in a merger of unrelated employers. What would we have done if client had terminated plan for reasons unrelated to the merger and then entered into merger talks? Would the merger have retroactively invalidated the distributions?

[Dave Baker]

I think you're OK if the termination takes place (as a formal, corporate matter) before the companies become related to each other. There's a reg that says the determination of who's the "employer" for purposes of maintaining a successor plan is made at the time of the termination, which I think means you have the ability to terminate without fear before the plan sponsor becomes owned/merged with the other company.

Probably not necessary to have all distributions made from the terminated plan's trust fund before the sale/merger takes place, just a formal termination (board of directors' resolution, etc.).

[Guest bswift]

if you terminate the plan by board resolution before the merger occurs and wait to distribute the assets after the merger you should be ok bc the irs should not treat the surviving company as having maintained the merged company's plan. The irs has approved this type of arrangement a number of times for various clients. If you're hesitant (which we were at first) flag the issue on the 5310 for the plan that is being terminated. Good luck.