Safe Harbor Plan and Sale/acquisition

Looking for some thoughts on this situation. Buyer company A is seeking to buy target company B. Company B is owned by a larger company and there are more than 2 401k plans in this controlled group.  Buyer company A sponsors a safe harbor plan and Target company B sponsors a safe harbor plan. Buyer A does not want to take over this plan they want it terminated before the sale, and then have participants roll over their balance to company plan A. Are there any options to terminate Company B safe harbor plan? The problem I see is that Seller B is part of a controlled group, and the successor alternative plan comes into play - if seller B terminates the plan, the termination is not a distributable event since there is another 401k in that controlled group. If they do not terminate the plan before the sale, and Buyer A takes over the plan, the successor 401k plan rule still comes into plan and if Buyer A terminates the plan it is not a distributable event. I see no clear guidance where you can merge a terminated safe harbor mid-year into another safe harbor plan (maybe this is ok?), or that you can distribute assets in a terminated safe harbor plan if there is a successor plan. Any thoughts?

You left out the answer to the most fundamental question - is this a stock sale or an asset sale?

stock sale - they wanted to term the plan before the sale. But we found out about other plans - the plan document did not state yes on is this a controlled group question.

Interesting question. You may need to check the details as it's been several years, but if I recall correctly, a sale of a subsidiary can constitute a separation from service even if the target's employees remain employed by the target post-closing. The theory is they separated from service with the controlled group "Employer" at the time of sale, as long as the buyer does not assume the target's plan. 

Might this let you have the seller terminate Company B's plan the day before closing, then distribute based on the target employees' separation from service at closing (instead of distributing based on a plan termination, which is all the successor plan rule would prohibit)?

You are going to need additional information about Company B and the Company B plan.  It sounds like the Buyer is buying the stock issued by Company B as a standalone entity within in its controlled group, and Company B is sponsoring a plan that covers only Company B employees, and no employees of any other company in the controlled group participate in the Company B plan.

If all of the above are true, then Company B can terminate its plan before the closing date of the acquisition, Company B's employees would fully vest.  On or after the closing date, the participants in the Company B terminated plan would be able to rollover their accounts to the place of their choosing including into the Buyer's plan.  This would not be true if the Company B employees were participating in any way in the plan sponsored by another company within their controlled group.  Also note that the Company B accounts could not be moved by an asset transfer or merger into the Buyer's plan, but would require the former Company B employees to choose to make a rollover into the Buyer's plan.

It also is worth noting that a plan termination and the distribution of accounts are different events and it is the plan termination that must be done before the acquisition.  The distributions will occur after all of the recordkeeping for the Company B plan is completed which will not happen until after the closing.

This is one of those situations where one small slip up can turn into a widespread disaster.  Given some of the nuances, the strategy for addressing the Company B plan should be worked out in detail before the closing date, and reviewed by legal counsel with experience with these situations.

This is a reply to EBECatty post - I looked for that option but it appears the Seller is a holding company that does not sponsor a plan. And then there is another company I guess its subsidiary that is part of the sale, and they sponsor the plan. And there appears to be a parent company that owns the Seller (holding company) that must be the one with the other plan. The way I have seen this sale of subsidiary work is when the subsidiary was a participating employer in the plan. Then, upon sale, it is treated kind of like a plan termination and the employees all have a distributable event. But the plan itself is not terminating so the successor plan rule does not come into play. I guess it is possible to restate the plan and have the overall parent become plan sponsor, and this subsidiary adopt the plan as a participating employer? 

In response to P - You are aware of the successor plan issue correct? So you are saying we can terminate a 401k plan even though another one is in the controlled group before the sale. Then after the sale, there will still be a successor plan because the buyer also has a 401k plan. So I am not sure how we have a distributable event here either before or after the sale?

Seems to me you would have the ultimate Parent seller assume sponsorship of the plan of the target sub prior to (and maybe subject to) closing of the deal and the target sub would adopt the plan as a participating employer.  Effective upon closing, the target sub would withdraw as a participating employer in the plan.  When the target company is no longer in the Parent seller's controlled group, the employees of the target sub will have had a separation from service from the Parent seller and all the members of its new controlled group.  This should be a distributable event as they have had a separation from service from the "Employer" (with a capital "E") that is maintaining the plan.  Now Parent Seller may not like this merely because some of the target sub employees may not take a distribution and it will be left with administering some orphan legacy type of accounts.  The Parent seller then would merge that plan with the orphan accounts into the plan it maintains for its employees.  I don't think you terminate the target sub plan because some of the target employees may not take their distribution and they can't be forced to (unless small account balance).... As my dad once said... there's always one in the bunch...  

@30Rock you can terminate the Company B plan before the sale but cannot distribute while the employees are still employed by the controlled group. After the closing, the Company B employees are no longer employed by the controlled group so you can distribute from the terminated Company B plan.

I have a similar situation.  Company Y purchased Company Z in a stock sale.  Both have 401(k) plans.  Company Z's plan was terminated the day before the acquistition transaction.  Company Z is continuing as Company Z, with new owners.  Company Z's employees are still employed under Company Z and are now participating in Company Y's plan.  Company Y's counsel affirms that terminating the plan the day before the transaction has created a distributable event for the Company Z participants of Company Z's plan, so each participant will be making their own distribution election (rollover, lump sum, ex.)  

Paul, in this scenario you would agree that since the plan was terminated the day before the transaction distributions are ok?

Thanks very much.

Yes.  I have seen this scenario several times.  I also have seen where the seller's plan was terminated after closing and participants received distributions.  We filed a VCP and worked with the IRS to get the client what everyone agrees was a very reasonable solution.

I'm sure the rest of you have similar problems, but I find that the majority of situations are only communicated to us AFTER the fact, (sometimes LONG after the fact) which contributes greatly to the potential difficulties. Fun, fun, fun!