Buyer's plan will not accept loan rollovers from seller's terminating

[Guest LMalone]

Our client(Buyer) is acquiring all assets of another company (Seller). Seller has a 401(k) plan with loans. Buyer has a 401(k) plan but will not accept rollovers of loans, only cash.

Seller terminates its 401(k) plan the day before closing by Board resolution. Seller intends to file a 5310 with the IRS and distribute after receiving approval.

Buyer does not want to monitor or in any way be involved with loans in Seller's plan. Buyer wants to offset the outstanding loan balances as of the termination date, even though distributions will not be made until IRS approval of the 5310 six to eight months later.

Is this permitted? What are some concerns?

In lieu of the above, could Seller (at the instruction of Buyer) amend its plan to say that all loans will become due and payable as of the termination date of the plan. If the loan is not repaid, a deemed distribution occurs.

Others must have experienced this. Any thoughts out there on how to handle situations like this?

Thanks.

[Alf]

I don't think you can do either.

I don't think that you can offset loan amounts in a 401(k) plan until you have a distribution because of the 401(k) distribution restrictions. Even if you have a plan termination, if you withhold distributions until your 5310 is approved, you haven't really had a distribution event, unless you have very favorable plan language that somehow provides that no distributions will be made on plan termination until IRS approval is received. Then, maybe you could argue plan termination for the 401(k) distribution restrictions, but not a distribution on plan termination yet. Otherwise, I think for consistency, your loan offset should occur when the distribution for plan termination occurs.

Deemed distributions are a section 72 taxation concept. By amending the plan to provide that all loans are due on termination is a contractual provision, not a tax one. If the provisions of section 72 are not violated, then there won't be a deemed distribution.

[QDROphile]

Unilateral termination or acceleration of loans are problematic. Loans are contracts. Did the terms of the loan, when made, allow for acceleration if the sponsor simply decided to amend the plan? Not likely.