Can Company B eliminate Company A stock in its plan or is it a cutback

[rocknrolls2]

Company A sells Division 1 to Company B on 1/1/2000. Company A spins off its 401(k) plan for the Division 1 employees to Company B's 401(k) plan. Company A permits its participants to receive a distribution of Company A stock in kind. Company B gives the Division 1 employees until 7/1/2001 to reallocate their balances attributable to Company A stock to other investment options. Reg. Sec. 1.411(d)-4, Q&A-1(B)(1) provides that an optional form of benefit includes all features relating to the distribution form, including medium of distribution (e.g., cash or in-kind). However, Reg. Sec. 1.411(d)-4, Q&A-1(d)(6) and (7) provide that "the right to direct investments" and "the right to a particular form of investment" such as investment in company stock are not protected benefits. How does one reconcile these apparently conflicting positions? My thought is that Company B can prevent Division 1 employees from making new investments in Company A stock either from future contributions or transfers of other investment options into Company A stock. However, Company B must make available to Division 1 employees the right to receive their account balances in the form of Company A stock. Any thoughts on this?

[Dowist]

The rules say that you can eliminate an employer stock fund as an investment option. Since presumably your plan says participants only receive an in-kind option to the extent that accounts are actually invested in the stock fund, you should be able to eliminate the stock fund so that participants would not have an in kind distribution right.

I think this is the right result not only under the rules, but from a practical standpoint. Why should Company B's plan be required to make Company A stock available? Plus if Company B's plan invests in Company A's stock, it wouldn't be employer stock, and you couldn't take advantage of the Net unrealized appreciation rules. In these circumstances, it would seem stupid (not a particularly technical term) to require Company B's plan to acquire A's stock just to make payments - what would be the point?

[Dowist]

The rules say that you can eliminate an employer stock fund as an investment option. Since presumably your plan says participants only receive an in-kind option to the extent that accounts are actually invested in the stock fund, you should be able to eliminate the stock fund so that participants would not have an in kind distribution right.

I think this is the right result not only under the rules, but from a practical standpoint. Why should Company B's plan be required to make Company A stock available? Plus if Company B's plan invests in Company A's stock, it wouldn't be employer stock, and you couldn't take advantage of the Net unrealized appreciation rules. In these circumstances, it would seem stupid (not a particularly technical term) to require Company B's plan to acquire A's stock just to make payments - what would be the point?