Spinoff

[Guest Eagle54]

Company A sponsors a 401(k) plan with 10,000 employees.

Company A is selling off a piece of their business to another company.

This is an asset sale.

Company B sponsors their own 401(k) plan.

Company B is buying a small portion of the assets of Company A.

As part of this transaction, approximately 500 employees of Company A will terminate employment with Company A and be rehired with Company B the next day.

Option 1 - The 500 employees are sent a distribution form and they can do what ever they want with their 401(k) at Company A.

There are no protected benefits, no crediting of prior service, everyone is a new hire at Company B.

Option 2 - Is there an option 2? Can these 500 employees be spun out of the Company A 401(k) plan and be transferred as a plan-to-plan transfer and not be given the opportunity to take a distribution?

Please let me know your thoughts in as much detail as possible.

Thank you for your assistance.

[Kevin C]

If A & B cooperate, yes, the portion of plan A covering the sold employees can be spun off and merged into Plan B. But, there may be reasons why Plan B wouldn't want to do so. For example, there may be operational issues with plan A or, there may be protected benefits under plan A that don't fit with the terms of plan B.

What is your position in this? If you represent A or B, you'll need to get professional advice.

[MoJo]

If A & B cooperate, yes, the portion of plan A covering the sold employees can be spun off and merged into Plan B. But, there may be reasons why Plan B wouldn't want to do so. For example, there may be operational issues with plan A or, there may be protected benefits under plan A that don't fit with the terms of plan B.

What is your position in this? If you represent A or B, you'll need to get professional advice.

There are also reasons why they should do it. Experience tells us that a large percentage of distributions will be *spent* and not rolled-over into any IRA (or new employer's plan). That results in a loss of retirement readyness for those employees,a nd a potential burden on the new employer (people just won't retire when they are supposed to).

Yes, there may be problems with Company A's plan - but any good attorney/consultant/provider can assist with due dilligence, and 1) identify the risks; 2) fix them, or plan for the fix; and 3) provide protection for the buyer (and their plan0 should something surface.

My "advice" has always been to "plan for the spin-off/merger" and only not do so if an truly unresolveable problem arises. Just my position. Many, many others would disagree - to the detriment of the employees, and ultimately the new employer....