spin off of participating employer

[K2retire]

We have a QACA plan for a controlled group. One of the participating employers would like to spin off into a different plan in the middle of the plan year. The controlled group status is not changing. They have assured us that the new plan will have identical provisions. (Although I'm skeptical that they won't add something.) The receiving plan is part of a MEP.

Notice 2016-16,  III D 2 is very clear that you can't do a mid-year amendment that reduces the number or group of eligible employees. Our plan would obviously be reducing the group of eligible employees. However, because those employees are continuing to be eligible in a plan sponsored by the same employer with identical provisions, a co-worker believes it would be OK to do. Is that correct?

Regardless of timing, we plan to write the amendment to transfer the balances of the impacted employees to the new plan at the time of the spin off. Going forward, if they have employees who move between companies, I don't believe those employees will have a distributable event in the plan they are leaving. Is there a way to write something into the spin-off amendment to allow the balances to move between plans for transferring employees?

Do we have a benefits rights and features issue due to different investment line ups?

[Kevin C]

There is no guidance, either formal or informal, from the IRS regarding spin-offs and mergers of safe harbor plans.  Without guidance, you will need to make a reasonable, good faith interpretation of the code.  If the safe harbor provisions in the spun-off plan are the same as the original plan and everyone in the original plan is in one of the plans after the spin-off, so that everyone gets the SH and deferrals they would have if the spin-off had not occurred, I think that fits within a reasonable good faith interpretation.  Others may disagree.  The "safest" alternative would be to spin-off at year end, but that isn't always possible. 

I agree that employees who move between members of the controlled group would not have a distributable event.  Your plan document may already have a provision to let you transfer their balances. Our VS document has a section titled Transfer of Assets that allows such a transfer.

I'll let someone else respond about BRF.  Have you looked at 410(b)?

[Madison71]

As to BRF, I would think that would fall under other rights and features that would need to be tested for current availability and either pass ratio or reasonable classification.  Effective availability should not be an issue

[JamesK]

Is it possible to construe this as one plan with two different plan documents and two different investment lineups?  I don't have the cite at hand, but somewhere in the regulations there is a fairly malleable definition of the breadth and scope of a "plan."  

Aside from the BRF issues, this may be a middle ground that meets everyone's needs and limits the exposure regarding mid-year changes to a QACA.  

That said, I am (like you) still wondering if there are some unspoken reasons for proposing the change.  Or it could just be that those managers think they can come up with better investment options.  Perhaps if you can address those concerns, then the rest of it will become a non-issue.