A 401(k) Plan covers only the employees of a subsidiary. The corporat

[John A]

When a corporation sells its entire interest in a subsidiary (which I believe is a distributable event under 401(k)(10)), and there was a 401(k)plan which covered only the employees of the subsidiary, is it better to pay everyone out and then terminate the plan? Or is it better to terminate the plan first? Or doesn't it matter?

[alanm]

A plan isn't terminated until the last dollar leaves. The proper sequence would be. 1. The selling company does a board resolution to terminate the plan and stop contributions before the buyout occurs. In the buyout agreement the acquiring company states they do not intend to pick up sponsorship of the plan. After the buyout, participants can take distributions and the plan can be terminated when participants are finished being processed out.

[QDROphile]

Would it surprise you to learn that you cannot require the the particpants to take a distribution if the Seller maintains another defined contribution plan?

[John A]

QDROphile,

Please provide a cite. Thanks.

[QDROphile]

Treas. Reg. section 1.411(a)-11(e).

[John A]

I agree that the participants would not be required to take distributions in that case. However, the participants could choose to take distributions - would you agree? And the participants could be forced to accept a transfer to another plan maintained by the seller if they did not choose to take a distribution - would you agree?

[QDROphile]

Agreed. There are ways to encourage particpants to choose a distribution. Most participants will choose a distribution when it is offered, so only the rugged few will stick it out. The plan informs the rugged few that the plan will be paying all of its own expenses, so the few accounts can expect to see much bigger deductions for plan expense. That usually smooths a few edges. And then you can transfer if necessary, which is less a problem now that most benefit options can be eliminated.

[John A]

Thank you.

[RCK]

Of course if the buyer does not have any other 401(k) plans, you might want to have them assume the 401(k) and terminate it. Then you could force out distributions. They would not have much incentive to do this, but our experience is that there is usually so much going in an acquisition that you might be able to trade this for something else.