Plan Issues in an Asset Purchase

[Laura Harrington]

Company A is owned equally by three other entities: B, C and D. All 4 companies adopted one 401(k) plan.

80% of the assets of Company A are sold to Company E. 80% of the Company A employees are also transferred to Company E as part of the sale.

Company A continues to exist with the other 20% of the assets and employees.

As part of the sale, Company E agrees to become successor plan sponsor of the Company A, B, C and D 401(k) plan. Company A, B, C and D will no longer be participating employers in the plan.

For the 20% of employees who stayed with Company A, there has been no severance from employment. They are still working for Company A.

In order to distribute the 401(k) assets from the plan that belong to the Company A, B, C and D employees is it necessary to spin-out the portion of the plan with their assets into a new plan and then terminate that plan?

I read through some prior posts and it was suggested a few times that since Companies A, B, C and D are no longer participating employers in the plan, that distributions could occur. But this does not make sense to me. Discontinued sponsorship in the plan I suppose could be construed as a plan termination of sorts with regard to just those entities, but I do not think you can terminate only a portion of the plan. Does anyone have support for the conclusion in the prior posts? Or support that you cannot distribute due to "plan termination" if the entire plan is not being terminated?

Thank you!

Laura

[Kevin C]

Interesting situation. Have they shared the reasoning behind wanting to do it this way?

Are Companies A, B, C & D going to have a DC plan going forward?

Does Company E currently have a DC plan?

[Laura Harrington]

Interesting situation. Have they shared the reasoning behind wanting to do it this way?

Are Companies A, B, C & D going to have a DC plan going forward?

Does Company E currently have a DC plan?

No, I do not know the reasoning behind doing it this way. I was just asked to research whether or not Company A, B, C and D employees can take a distribution.

A,B,C and D are not going to have a DC plan going forward.

Company E does not have any other DC plans

Thanks!

Laura

[Kevin C]

Company A, B, C & D employees can only get distributions if they have a distributable event. I don't see anything in the regs saying that having your employer no longer participate in the plan or a partial plan termination are distributable events. If someone has a cite saying they are distributable events, I'd love to see it.

They can get a distribution if the plan they are in terminates and their employer does not sponsor an alternative defined contribution plan for at least 12 months after the final distributions.

With what you have described, Companies A, B, C & D would adopt a new plan. Their portion of the old plan would be spun-off and merged into the new plan. Then, the new plan could terminate. But, it seems silly to adopt a new plan and immediately terminate it.

Or, you could have Company E adopt a new plan. Then, spin-off the portion of the old plan for the sold employees and merge it into Company E's new plan. The old plan can then be terminated by Companies A, B, C & D. You get to the same place. This option makes more sense to me.