Assuming assets and liabilities of another plan

[Belgarath]

I've never seen this question before. Suppose you have business A - a sole proprietorship employing Dad, Mom, and a bunch of part time employees. They have a PS plan.

Now son B decides to establish his own business. Technically unrelated to Dad's business, although it is likely (they are doctors) that Dad's previous patients will come to Son B. Son B will employ Dad and Mom in his new business. Son B is establishing a PS plan. The question came up - can Son B's plan assume the assets and liabilites of Business A's plan?

Part of me says "why not" and part of my says "how the heck is that possible" when Son is not buying Business A and there is no technical business relationship or merger?

Any thoughts on this? I'm just sort of drawing a blank...

P.S. Dad is ceased his business A as of 12/31/10, if that makes any difference in your thoughts.

[Bird]

We've done it both ways - 1) had the new employer adopt a new plan and terminate the old and let people do what they want, including rollover to new, and 2) just have the new employer adopt the old plan. If #2, we have the old employer consent to the action.

There shouldn't be any net liability in a DC plan; I don't think I'd want to do it in a DB plan...though of course it was done routinely in the '80s for the sole purpose of getting at excess plan assets.

I'd be more likely to suggest #1 if plan operations or documents were suspect or unknown.

[Belgarath]

Hi Bird - thanks. I should have said that Son's business has established a PS plan - for 2010, apparently, so it is an issue of merging the plans in 2011. And while I couldn't find anything in 414(l), 401(a)(12), or ERISA 208 prohibiting this, it just "feels" strange - like I'm missing something entirely too obvious. But I suppose this is beneficial in that it is cheaper to merge the plans than to formally terminate the Dad's PS plan.

[david rigby]

Could B purchase Dad's business? If so, that (probably) makes B the new sponsor.

Get legal advice of attorney with ERISA experience.

[Belgarath]

Thanks David. When all is said and done, I expect they will just take what is definitively allowable, and just terminate the existing plan and roll over the assets to the new plan established by the Son. 'Cause I'd be willing to bet that they won't involve an attorney anyway. This is just annoying me, because I feel like I should know the answer.

[Lou S.]

While we have done it both ways in the past I wonder, if B isn't buying A, how does B satisfy the exclusive benefit rule if some (or all) of the participants in the assumed plan A never work for B?

[masteff]

Does Dad's plan document say anything about appointment of successor plan sponsors?

Of course Dad could simply maintain the plan. See this recent discussion about whether a plan became an orphan: http://benefitslink.com/boards/index.php?showtopic=43782

[Bird]

I should have said that Son's business has established a PS plan - for 2010, apparently, so it is an issue of merging the plans in 2011. And while I couldn't find anything in 414(l), 401(a)(12), or ERISA 208 prohibiting this, it just "feels" strange - like I'm missing something entirely too obvious. But I suppose this is beneficial in that it is cheaper to merge the plans than to formally terminate the Dad's PS plan.

I've done mergers of plans for unrelated businesses, too. I don't think there's any reason you can't, again, with both sponsors' approval.

[Kevin C]

You might find something addressing this in the Son's PS plan document. Our VS document has a section on transfers from other plans that starts with:

14.05 Transfer of Assets. The Plan may accept a transfer of assets from another qualified retirement plan on behalf of any Employee, even if such Employee is not eligible to receive other contributions under the Plan. If a transfer of assets is made on behalf of an Employee prior to the Employee’s becoming a Participant, the Employee shall be treated as a Participant for all purposes with respect to such transferred amount. Any assets transferred to this Plan from another plan must be accompanied by written instructions designating the name of each Employee for whose benefit such amounts are being transferred, the current value of such assets, and the sources from which such amounts are derived. The Plan Administrator will deposit any transferred assets in the appropriate Participant’s Transfer Account. The Transfer Account will contain any sub-Accounts necessary to separately track the sources of the transferred assets. Each sub-Account will be treated in the same manner as the corresponding Plan Account.

There is also language about protected benefits if the transfer was not initiated by the participant and other language about specific situations that might arise.