plan sponsor is purchased, how to treat participating employer

[WCC]

Hello,

The sponsor of a 401k safe harbor was purchased via a stock sale. The participating employer was not purchased. There is no longer common ownership between the new sponsor and the participating employer. The purchaser wants the participating employer to stop participating immediately. It is not cost effective for the participating employer to create its own plan (but may be necessary).

Question: I know safe harbor plans can be terminated for cause if the employer is involved in a merger, acquisition, change of controlled group... However, the plan is not being terminated immediately, the participating employer is terminating participation immediately and they don't want to start a new plan. I am thinking that they would have to set up their own plan, and then terminate it. Otherwise no distributable event exists?? Any other thoughts?

Thank you

[QDROphile]

There may be more elegant solutions, but if you want a step-by-step approach that is essentially self-explanatory, you would spin off the participating employer portion of the plan and terminate it. Except for the amendment to spin off and terminate, the particpating employer should not need additional plan documents. The trustee might insist on a separate trust document for the spun-off plan. A determination letter would be a good idea. It is a shame to terminate the spun-off plan. Someone should reconsider.

[WCC]

It is a shame to terminate the spun-off plan. Someone should reconsider.

Thanks for the fast response. I agree but they are convinced that they don't want the plan for 3-4 employees who don't defer over the IRA limits.

I do have a follow up question. The bundled recordkeeper is telling me that instead of spinning them off in to a new plan and then terminating that plan we should do the following:

Treat the employees of the participating employer the same as if they are terminated employees of the plan sponsor. The employees are then considered terminated and a distributable event exists. Their reasoning is that the participating employer is severed from the plan and the employees of the participating employer are no longer eligible to participate; therefore the employees are terminated. The employees of the participating employer are then paid out.

This sounds odd to me. In my research I cannot find any documentation that would support that approach. Am I missing something? Does their approach sound accurate?

Thank you

[QDROphile]

This analysis is similar to the analysis under that allows termination of a plan immeidately before a stock acquisition and not have the plan of the buyer be a successor plan. The target company controlled group (a one company controlled group) is not the same employer as the post-acquisition controlled group (a two company controlled group). The plan of the post-acquision controlled group is not a sucessor to the plan of the target company controlled group. This is an imperfect analysis, but a practical one that the IRS believes.

Your circumstances work backwards. The post-acquistion controlled group that includes the plan sponsor is a different employer than the post-acquisition controlled group that includes the participationg employer (a one-company controlled group). If the participating employer no longer maintains the plan and is not in a controlled group that maintians the plan the employees have a severance from employment. Treas. Reg. 1.401(k)(d)(2). They cannot be required to take a distribution if the account balances are greater than the mandatory distribution amount. Confirm that the particpating employer is not eligible to particpate in the plan, which is probably tha case because most plans allow only members of the sponsor's controlled group to participate.

[WCC]

Thank you!

[QDROphile]

Correction of citation: Treas. Reg. 1.401(k)-1(d)(2).