HELP!

[Guest ConnieLawson]

We have a cafeteria plan with a company that split into 2 companies, the original company is ok with documents, etc...and their banking account for the cafeteria plan; the 2nd company is no longer part of a controled group, but rather on their own, so I am in the process of creating new documents for this new plan starting May 1st (short plan year 1st year); my question is can the first company transfer the employees money they have in their account to the new plan account and does the new company employees have to sign a new enrollment form for May 1st start date?

[QDROphile]

There is no employee money under the plan. The two companies can make whatever arrangements they desire with respect to their assets and liabilities, including transfer of funds to balance assets and liabilities. The transactions should be taken into account in the larger scope of the spin off of the second company.

Supplement to response: It probably would have been best for the portion of the cafetria plan with the second company employees to have been spun off. Then you would have continuity and no initial enrollment or election questions; you might have some questions if anyone wants to justify a mid-year change in election based on the events. It may still be possible to treat the seocnd company plan as a spun off plan, but both companies will need to be engaged in the formalities.

[QDROphile]

You asked for more details about a plan spin off. You start from the idea that both companies maintain the plan. If the companies are not effctively independent in covering costs of their respective employees, you will have some complications when you spin off, but that can be covered as part of the terms of the spin off and may involve transfer of funds from one company to another. To keep the picture simpler, assume that each company effectively covers costs for its employees. The plan itself is mostly blind to actual funding. As company 2 departs the controlled group, company 2 keeps its part of the plan and the plan has exactly the same terms as before except the coverage definition changes to focus only on company 2 employees and perhaps also company 2 former employees. The "new" plan is a continuation of the original plan and would not have a short plan year with respect to the employees -- nothing would change for the employees except they might submit claims to a new administrator. For purposes of certain other formalities, the new plan starts life as of the effective date of the spin off, so if there is a medical spending account, the first 5500 would be filed for the year of the effective date. Consequently, there is some ambiguity about the "date" of the plan if the effective date is mid-year in a calendar year plan, but the duality should not cause much trouble and you might take the position the the effective date is the first day of the plan year despite a later apparent effective split. Part of the resolution may depend on how liabilities are apportioned between company 1 and company 2. I assumed away most of the complexity by having each company effectively be liable for its employees even before the spin off. Post-spin off amendments are probably needed, such as the refitting of eligibility terms, even if the eligibility and coverage issues were addressed in separate spin off documentation.

The welfare plans funded through the cafeteria plan apart from the spending accounts have to be coordinated. For example, will company 2 be able to maintain a group health insurance policy with the same terms and premiums after the corporate spin off? Adjustments to the underlying plans may be events that allow participants to change elections.