Spin-Off - When is it appropriate to do a spin-off 401(k)?

We have a client (A) that purchased a division of another company (B) and wants the employees of that division to "merge" into A's existing 401(k) plan. B's TPA told our client (A) that they could do a spin-off. 

Our general understanding of a spin-off is that it results in a new company and a new 401(k) plan. Neither of those things are happening.

Additionally, company (B) currently sponsors a 401(k) plan and since only one division was sold to our client they will not be terminating their plan. 

We don't see how this could be treated as a spin-off or a merger. Can anyone give insight as to when a spin-off is an appropriate measure and if there is anyway that this would not be a distributable event for the participants of Company (B)?

Thank you!

You can spin off a plan - that is, split a plan into two or more pieces, regardless of any changes or lack thereof to the sponsoring employer. The new plan, for the division being sold can then be merged into the buyer's plan. However, if those employees are terminated from B, you can distribute according to elections or possibly do a trustee to trustee transfer w/o the administrative hassle of a spin-off merger. Also think about vesting for these employees, which might need coordinated effort/agreement between buyer and seller if full vesting is desired or non-vested balances are to be transferred as well, and then there's the possible partial termination. I'm sure others in this forum who deal with 401(k)s more than I may have further insights.

CuseFan and B's TPA are correct, a spin-off can occur for any or no reason whatsoever; you just have to have a definitely determinable group of employees, easily satisfied by the divisional group dealt with here.  B's Plan will execute the spin-off and resolution, A's will execute the merger and resolution.  Just have to ensure that vested account balances are preserved and any joint & survivor benefits are protected.  Otherwise its an administratively simple transfer.  A will need to make sure their Plan will accept the transfer of loans if any.

Nate S, In addition to the points you have raised about what has to be preserved, you also have to preserve the optional forms of distribution available under B's plan (which can be limited to the amounts being spun off into A's plan). The IRS regs do provide plenty of options for validly eliminating some of these via amendment without running afoul of the anti-cutback rule.

This is cringe-worthy, because it could have been (much) more easily addressed prior to finalizing the buy-sell agreement.  Assuming this proposed spinoff is being done after the corporate transaction, you will want to discuss with the Plan's attorney whether this action (creating a spinoff) might itself create a violation of the anti-cutback provisions. 

3 hours ago, david rigby said:

(creating a spinoff) might itself create a violation of the anti-cutback provisions

david rigby, your thinking is that denying the spun off employees the distribution to which they might be entitled without the spinoff could be a cutback? It's a good point, and if vesting is involved and the transaction amounts to a partial termination, the spun off employees would also be potentially losing accelerated vesting. Having said that, I don't see how the acquired and selling companies' contractual agreement in the original deal doc should have greater legitimacy than their post-deal agreement, other than, perhaps, if a partial term has now occurred, then doing the merger now without fully vesting them (which of course you could do by amendment) would seem to cure that.

Interesting case.

Thanks for all the advice and information. One more thing, the buying company, our client, already sponsors a 401(k) plan. They want to "spin-off" the division of Company B that was purchased into their existing plan. However, my understanding is that a spin-off creates a new plan entirely. As Cusefan indicated, they could spin-off then do a term/merger however, I do not believe this is the client's intention. 

The intention was to merge the 401(k) accounts of the purchased division into the existing plan. However, because this was an asset sale, if the sales contract did not specifically address this then I believe there is a distributable event for the employees of the division that was purchased. 

Am I missing something here?

A spinoff does not have to create a new plan. You could spin off the accounts of the employees of the division that was purchased and merge those accounts into the existing plan. That's pretty much what a spinoff is for.

6 hours ago, MrsMacias said:

Am I missing something here?

What Bird said. Subject to the complications pointed out in earlier posts, it generally can be done as Bird has stated. MrsMacias.

Just because you can doesn't mean you should.

Why would a plan sponsor want to go through this hassle? 

It's DC plan, not a DB plan.  The participants have their money from B's plan.  They will get new money in A's plan.  They aren't losing anything.

Why muck things up?  

35 minutes ago, acm_acm said:

Why muck things up?  

The sponsor might want to keep the money in the (a) plan for various reasons, among them paternalism.  

51 minutes ago, Bird said:

The sponsor might want to keep the money in the (a) plan for various reasons, among them paternalism.  

And eventually you grow your plan to a point where you can negotiate a better fee with your mutual fund platform. There are risks, however, and some buyer due dilligence on seller's plan is usually in order.

On 6/9/2022 at 1:53 PM, acm_acm said:

Just because you can doesn't mean you should.

Why would a plan sponsor want to go through this hassle? 

It's DC plan, not a DB plan.  The participants have their money from B's plan.  They will get new money in A's plan.  They aren't losing anything.

Why muck things up?  

Low risk/return investments, loans, and early access are the three biggest things employees do to erode their own retirement future.  I applaud any employer effort to keep participant monies safe and out of their hands before actual termination/retirement.