Distribution upon Sale of Subsidiary

[Scott]

Company A sells Company B, a wholly-owned subsidiary, to Company C. Company A sponsors a 401(k) plan, under which Company B was a participating employer prior to the sale.

Code Section 401(k)(10)(A)(iii) allows for a distribution of elective deferrals in the event of a disposition of a subsidiary, provided certain conditions are satisfied. However, Company A's plan does not specifically provide for such a distribution. Must Company A's plan be amended to provide for the distribution, or can the distribution be made without amending the plan?

Company A wants to clear out the accounts of the employees of Company B. Company A would like to avoid amending the plan because the plan is a prototype document, and such an amendment would cause it to become an individually-designed plan.

[Guest dwayne]

I do not believe the plan would need to be amended. The fact that Company A still maintains the plan after the disposition should be sufficient.

[QDROphile]

The Company A cannot "clear out " the accounts of the employees of Company B. The 401(k)(10) rules merely allow the Company B participants to take distributions as if they had terminated employment. They may not be forced out unless their accounts are less than $5000. Company A would have to transfer the accounts to Company C's plan to be rid of the accounts. Check with legal counsel to see if a transfer (or spinoff and merger) can be done under the prototype document without amendment. Also, the Company B employees have a limited window to elect to take a distribution from Company A's plan based on the sale to Company C.

[Scott]

QDROphile,

You are right. "Clear out" was a poor choice of words. I am aware that Company A cannot make a distribution of an account in excess of $5,000 unless the participant consents. Since the purchaser maintains a 401(k) plan, it is likely that most, if not all, of Company B's employees will want a distribution.

Do you agree with dwayne that a distribution could be made even though the plan does not specifically provide for a distribution upon the sale of a subsidiary? I just haven't been able to find any authority on this issue.

Also, what is the "limited window" you mention? All I am aware of is the rule that a distribution will not be treated as having been made in connection with a disposition unless it is made by the end of the second calendar year after the calendar year in which the disposition occurs.

[Guest bswift]

Scott, if the plan doesn't specifically permit a distribution based on an event described in 401(k)(10), what is the underlying event under the plan which gives rise to the basis for the distribution? Under the same desk rule, it can't be separation from service. I have typically counselled clients that want to take advantage of events under (k)(10) as a basis for distribution that the plan should so provide. Otherwise, the plan risks disqualification for making an in-service distribution not permitted by the plan document. In my mind the question is the same if it were phrased as "can the plan make a hardship distribution, when hardship distributions are not permitted by the plan?" With all due respect, my recommendation if it were my client would be to amend the plan. The other issue is what prototype doc wouldn't permit (k)(10) distributions? good luck

[QDROphile]

The "limited window" refers to Treas. Reg. section 1.401(k)-1(d)(4)(iii). The distribution must be in connection with the acquisition. If someone waits too long to take advantage of the opportunity to get a distribution, they lose it because it is no longer "in connection with" and they must have another reason. Bad news if anyone stays back. You have to find out from Company B (now a stranger) if the participant has separated from service. Here's another trap: if Company A's plan transfers (but not a rollover or an elective transfer) funds to Company B's plan (or a plan in the Company B controlled group), Company B maintains the plan of Company A, so Company A's plan cannot distribute under 401(k)(10). See Treas. Reg. section 1.401(k)-1(d)(4)(i).