Maintaining Pension Plan with Proceeds of Sale

[Dougsbpc]

Suppose you have a 100% shareholder of a corporation with 20 employees. The business sold as an asset sale. In other words the buyer did not purchase the corporation but instead paid $ xxxxxxxx for the business.

The seller, who will maintain the corporation wishes to establish a defined benefit plan that would only cover him.

I seem to remember reading something about how this type of thing may require covering former employees.

I could see how this may be considered an affiliated service group if the buyer were purchasing stock of the corporation over time, but would that be the case with an asset sale?

I know this is a legal question. Just wondering if anyone ran into the article I read about this a number of years ago that I cannot seem to find?

[Kevin C]

I haven't seen the article you mention, but an example in 1.401(a)(4)-5 is very close to the situation you describe.  If the former employees are excluded, the timing of the establishment of the DB plan would be discriminatory. 

Quote

1.401(a)(4)-5(a)(4) Examples. The following examples illustrate the rules in this paragraph (a):

Example 1. Plan A is a defined benefit plan that covered both HCEs and NHCEs for most of its existence. The employer decides to wind up its business. In the process of ceasing operations, but at a time when the plan covers only HCEs, Plan A is amended to increase benefits and thereafter is terminated. The timing of this plan amendment has the effect of discriminating significantly in favor of HCEs.

You should also look at examples 7-10.