Sticky Spinoff Issue

[Scott]

Corporation A sponsors a 401(k) plan. Corporation B, a wholly-owned subsidiary of A, participates in the plan, along with several other subsidiaries of A. In 1999, Corporation A sells Corporation B to an unrelated purchaser. In connection with the sale, the parties agree to spinoff the assets of the 401(k) plan relating to B's employees to a new plan sponsored by B. The parties also agree that all forfeitures in A's plan as of the date of the spinoff will be allocated to participants' accounts as of that date.

When the transfer of assets to B's plan occurs, A's plan inadvertently transfers too much to B's plan. The excess relates to forfeitures that should have been allocated to employees of other subsidiaries of A not involved in the sale and spinoff--thus, those amounts should have remained in A's plan and should have been allocated to participants in A's plan. How and why the error occurred is not clear. The error is not discovered until approximately a year after the transfer.

Now that the error has been discovered, the parties agree that B's plan owes to A's plan an amount equal to the amount of the excess transfer, plus an earnings factor based on what that amount would have earned in A's plan to date.

The question is, can existing forfeitures in B's plan be used to cover the earnings amount that must be paid to A's plan, or must Corporation B come up with the cash to cover the earnings amount?

[Richard Anderson]

Here's what I think.

Both plans should be put back in the same position that they would have been, if the mistake had not occurred. To do that the amount that plan B owes to plan A should come from the accounts of those who received the excess forfeiture allocations. They are the ones whose accounts were allocated too much and who benefited from earnings on the forfeitures. Current forfeitures would be allocated to a different group of participants. If current forfeitures are used to pay the earnings, then new participants are harmed. They pay for the mistake by getting a lower allocation of current forfeitures, but they did not benefit from the original mistaken forfeiture allocation.

I would make the correction only from the accounts of those who were allocated the wrong amount of forfeitures in the first place. I would allocate current forfeitures per the plan document.