Is a 401(k) Spin Off a Viable Option? What are the considerations?

Company A sponsors a 401(k) plan and there are two participating employers who are currently a part of the same controlled group with Company A.  Buyer is purchasing Company A only.  The participating employers are not being purchased and Buyer / Seller do not want to create a multiple employer plan by allowing the employers to continue participation post-closing.  Can the current plan be spun off into two plans and if so, are there any concerns that the assets are and will continue to be comingled post-closing considering that the participating employers will no longer be a part of Company A's controlled group?

As long as Company A employees are made ineligible, to prevent any new benefits from arising for them, their assets should be allowed to linger behind (as a bunch of ex-employees from the ongoing plan sponsors, right?) until the spinoff is executed.

If I understand the situation correctly, we can look at as Companies A, B and C are in a controlled group.  Company A sponsors a plan and Companies B and C are participating employers in Company A's plan.  There is a Buyer who wants to buy Company A, and does not want to buy Companies B and C.

You do not say if the acquisition of Company A by the Buyer is an asset sale or a stock sale.

If it is an asset sale, the employees of Company A will be considered to have terminated employment from Company A and been hired as new employees of the Buyer.  Company A will continue to exist until it goes out of business.  A scenario under these circumstances may be to have either Company B or Company C assume sponsorship of Company A's plan.  After the acquisition, the former employees of Company A could take a distribution the former Company A plan (now the B or C plan) including making a rollover their balances into the Buyer's plan.

If it is a stock sale, the employees of Company A will not be considered to have terminated employment from Company A.  If the goal is not to have a multiple employer plan, then action will need to be taken before closing on the sale.  A scenario under these circumstances may be to have either Company B or Company C assume sponsorship of Company A's plan, and to make Company A's employees ineligible to participate in the plan as Bri commented. After the acquisition, the Buyer could arrange a trust-to-trust transfer of the Company A participants' accounts in the former Company A plan (now the B or C plan), into the Buyer's plan.

These are just two scenarios out of many.  Some key points to keep in mind are:

• there are more scenarios available before closing than are available after closing.
• treatment of plans in asset sales generally are simpler that in stock sales.
• in the chosen path forward for the plan(s), be mindful of the need to coordinate the structure of the associated trust or trusts .