401(k) termination and distribution prior to sale of stock in plan spo

[Guest EMC]

What is the current environment for terminating a 401(k) plan sponsored by an employer that is being acquired in a stock sale? Since "the employer" is determined as of the day of the termination, if the termination is done before the stock sale, do the 401(k) "successor plan" regulations even come into play?

[Alf]

Terminating the plan prior to the acquisition is generally accepted as being effective for the buyer to avoid liability for the acquired plan, but it is not without risk. A qualfied plan is not technically terminated until all assets have been distributed from the trust. Although the IRS has been accepting the notion that the termination date relates back to the proposed date of termination, you can blow it by not distributing assets or filing a Form 5310 within one year of the proposed date of termination.

[Guest EMC]

Good call, Alf. Private Letter Ruling 199931047 confirms that for this purpose, a plan termination occurs when a board of directors resolution is effective and affirmatively sets a plan termination date. Obviously, the plan termination would require the sponsor to meet all termination requirements (re: distributions, etc.). This technique appears to be especially useful where the Buyer that has an active acquisition mode can rid itself of costly "merger/asset transfer analysis" issues and still allow the Seller's employees to roll their balances into the Buyer's 401(k) plan in an orderly and efficient manner. Thanks for taking the time to respond.

[KJohnson]

I understand that the control group is determined at the date of termination of the Plan so that, in a stock sale, if the target terminates its plan before it is acquired there is no problem.

However, I've always wondered what happens if the target is then merged into the purchaser within a year after the transaction. From a corporate law standpoint the target and the purchaser are then "one company" and it would appear that the merger would create a violation of the successor plan rule (assuming that the purchaser has a plan that covers the target's employees).