Merger/Acquisition & Successor Plan Rules

[LANDO]

Question about mergers/acquisitions and successor plan rules.  Company A and Company B are a parent subsidiary controlled group and both participate in A's 401(k) plan. Company C buys the stock of Company B.  Company B immediately ceases participation in the A's plan and becomes a participating employer in C's 401(k) plan.

Company C refuses to accept a trustee to trustee transfer of assets and liabilities for B's employees from A's 401(k) plan, nor will C agree to a spinoff and merger on behalf of B's employees.

I wouldn't think B's employees would be eligible for termination distributions from A's plan until they terminate from Company B, right?

Can Company A spin off the portion of the plan that holds B's employee's balances, terminate it, and pay out the balances even though B is now a participating employer in another 401(k) plan (C's plan)? 

[EBECatty]

As long as Company C is not in the A/B controlled group before buying the stock of Company B, and no assets/liabilities/sponsorship are transferred to Companies B or C at or after closing, employees of Company B will have a severance from employment for Company A 401(k) distribution purposes once Company B leaves the A/B controlled group (the pre-closing "employer") and joins the new C/B controlled group (the post-closing "employer"). 

I think 1.401(k)-1(d)(6)(ii) is on point. 

[LANDO]

That is awesome! And you're right...perfectly on point!  Thank you so much EBECatty. 

[CuseFan]

And not that it matters for the answer, C's position is likely that it did not want any of the compliance liability for B's portion of A's plan that would have followed any direct transfer or merger. However, B employees now in C's plan can rollover their A plan distributions to C's plan if so desired.