Plan-to-Plan Transfer of Assets

[Scott]

Company A and Company B own 51% and 49%, respectively, of Company C. Company C has an overfunded DB plan. Company A and Company B agree that Company A will assume the operations of Company C. As part of the agreement, all of Company C's employees will be transferred to Company A and will participate under Company A's benefit plans, leaving Company C with no employees. Assets of the Company C plan equal to the Company C participants' accrued benefits will be transferred to Company A's DB plan. After the transfer, the Company C plan will be left with assets equal to the overfunding, but no accrued benefits or participants.

Company A and Company B want the overfunding to be split between the two companies in proportion to their ownership interests. Under this scenario, 51% of the remaining assets of the Company C plan will be transferred to the Company A plan.

The question is---can the other 49% of the remaining assets of the Company C plan be transferred to Company B's DB plan if no participants or accrued benefit liabilities will be transferred to that plan?

[david rigby]

I'm not an attorney, but this does not smell right to me. If assets and liabilities are transferred from C's plan to A's Plan, then 414(l) is at issue. I think C's plan must already state that excess assets (that is, if the plan were terminated) will be returned to the ER. Anyone disagree?

Next issue, if C's plan has "overfunding" as described above, then nothing happens to it unless that plan is terminated. The rules of the Plan govern where that excess goes. Assuming the Plan states that the excess will be reverted to the ER, then C gets that full reversion, and pays the appropriate taxes. Then the owners/management of C can decide what to do with whats left (after Uncle Sam takes out his very large chunk).

If the goal is to transfer the "overfunding" into the plans of A and B, then a plan merger is the way to do that. If A and B each want their share of the excess, then it may be necessary to split C's plan first, and then merge the appropriate split plans into A and B.

Have I missed something?

[Guest]

I'm also no attorney and I would definitely recommend you consult with one before doing any of this, but.... There is a company called Financial Frontiers (I'm sure you have probably heard of them) who buys over-funded DB Plans for about $.75/$ of excess assets. My understanding is that the seller sets up a shell corp then has that corp adopt the overfunded plan and then the shell corp w/ the Plan are sold to Finincial Frontiers. At this point, Finincial Frontiers does whats necessary to either pay out all the participants or purchase annuities so that they are left with a plan with only assets and no liabilities. They then take this plan and shop it to an underfunded plan.

The reason I bring this up is that it sounds similar to what Scott wants to do. I'm not saying PAX is wrong, I think he/she raised good points, but based on what I know about Fin. Front., Scott may not be that far off from an solution and may want to dig deaper into how Fin. Front. does business.

[Guest Alex B]

pax is correct that a transfer of plan assets and liabilities will trigger 414(l)(2) which generally requires the excess assets be approtioned based on the liabilities transferred. However, there is an exception under 414(l)(2)(D)(ii) that no apportionment is required where the overfunding is leaving the contolled group. 414 looks to 1563 for controlled group definition, which generally requires an 80% ownership for parent-subs. Here you have A with 51% and B with 49% ownership of C. It seams that you could accomplish your goal of spinning off the participant liabilities and some overfunding to A and the balance of the overfunding to B. You may consider spinning off the retired and term vested to B along with the overfunding and have the B plan purchase annuities for those folks.

If A and B prefer to receive cash value for the overfunding as Keith N points out, they could sell the stock of C to a strategic buyer that will pay 75% or more for the overfunding in the stock price. I prefer to use Pension and Tax Advisors (888) 801-5269.