401(k) Spin-Off - Successor Plan Issues?

Three companies were members of a control group with employees from all three entities participating in the 401(k) plan. The company that originally set up the plan was sold in a 100% stock sale effective 12/31. The buyer requested the plan be terminated effective 12/30 and the BOD passed a resolution to that effect. The remaining two companies of the control group want to set up a new 401(k) plan with the same structure as the prior plan but only the employees of the two remaining entities. Does this trigger any successor plan issues? Thanks!

1 hour ago, In-house Attorney said:

Does this trigger any successor plan issues?

The adoption of a new 401(k) plan by the remaining 2 employers within 12 months would qualify as a successor plan under the 1.401(k)-1(d)--I think it's (d) Treasury Regulations. Technically, if the 2 employers were to set up a successor plan, it would not impede the ability of the employees of the company whose stock was sold to receive a distribution from the terminated 401(k) plan because they also have a "severance from employment." But the employees from the 2 remaining entities would not have a "severance from employment" and under the successor plan rules would not be able to receive a distribution from the terminated plan on account of plan termination. You can see the havoc and mess this causes in terms of administration and communication. It is better to terminate, distribute (rollover) all accounts, and then wait 12 months after date all assets are distributed before setting up another 4019k). In the intervening time, they can set up a stand alone PS plan or SEP or Simple IRA (but be careful, because these also have limitations). 

Thanks. Could the employees of the two remaining entities be required to move to a spun-off plan established by the two remaining entities instead of being able to take a distributions in some other fashion?  

1 hour ago, In-house Attorney said:

Thanks. Could the employees of the two remaining entities be required to move to a spun-off plan established by the two remaining entities instead of being able to take a distributions in some other fashion?  

Your "spun-off" plan would be a new plan, and if it is a 401(k), it would be considered a "successor plan." With exceptions that do not apply here, employers cannot require employees to participate in an employee benefit plan. As a successor plan, the distribution limitations I have described above would apply. Tread carefully.   

I agree with Former Esq's first comment, but not fully with second. First, query why this was done this way. If the target had adopted resolutions unadopting the plan, then the acquisition would have pulled that company and its employees out of the controlled group that sponsored the plan, and so the employees would have been former employees entitled to distributions. Same consequence that target company employees get distributions (and they could have been fully vested by amendment prior to closing, if that was an issue), without the remaining two companies having to deal with this.

If the plan is terminated as to the remaining 2 companies as well, then you will probably have to distribute to them and won't be able to have a new 401(k) for a year before starting new from scratch, as explained by Former Esq. It depends on timing and to-date paperwork, but if you can't stop the termination you might be able to spin off the portion of the plan for the 2 remaining companies into a new 401(k), without offering the employees of the two remaining companies distributions. Again, depends on plan provisions, what the existing resolutions say, what comms with employees have been, etc.

18 minutes ago, Luke Bailey said:

but if you can't stop the termination you might be able to spin off the portion of the plan for the 2 remaining companies into a new 401(k), without offering the employees of the two remaining companies distributions.

Luke and In-House Attorney, I see that I completely misunderstood In-House's second question. Yes, you can do the spin-off but just remember that the remaining employees cannot take a distribution from the spun-off plan on account of plan termination. 

23 minutes ago, FORMER ESQ. said:

Luke and In-House Attorney, I see that I completely misunderstood In-House's second question. Yes, you can do the spin-off but just remember that the remaining employees cannot take a distribution from the spun-off plan on account of plan termination. 

Right.

Thank you Luke and Former Esq. The termination cannot be unwound since the closing occurred on 12/31 and the buyer would have successor plan issues if the plan was reinstated and sponsorship was then transferred to the other affiliates in the control group. That would have been the way to go but I think that ship has sailed. There has not been any communications with the participants in the terminated plan yet but the termination resolutions didn't contemplate a spin-off. But if I understand both of you correctly it sounds like if the participants in the terminated plan that are employed by the other affiliates agree to transfer their accounts to the new plan then we are ok? That seems to be the position the service provider is taking since the original plan sponsor is no longer in the control group. 

1 hour ago, In-house Attorney said:

But if I understand both of you correctly it sounds like if the participants in the terminated plan that are employed by the other affiliates agree to transfer their accounts to the new plan then we are ok?

In-house Attorney, I don't have all the facts, have not reviewed documents, etc., so just really addressing a briefly-described hypothetical.

Generally, if you ask the participants individually, one might say no, and also the line becomes blurred as between a rollover and spin-off merger. So my prior comment addressed the situation where you would not have to ask the participants. If they all say yes, then the IRS might be OK with that at a practical level, not being as picky as we private practitioners about the esoterica.

I looked through the relevant Code and the Plan document and wanted to run one more thing by you. The termination section of the plan essentially provides that the plan freezes (no new contributions, etc.) once the board elects to terminate but also states that all other provisions of the Plan remain in force.

 The Plan further provides a Participating Affiliate, which the other two companies would be, may withdraw from the Plan and the Trust without the Plan Sponsor i.e. the sold company's written consent. The Participating Affiliate just has to adopt a plan and trust identical to the original one and then the assets of the Trust allocable to Employees of the Participating Affiliates are transferred to the trust adopted by the Participating Affiliates.

Based on these two sections, it would seem that we could accomplish what we want to (i.e. move the employees of the two companies to the new plan). It would also seem the employees remaining with the company terminating the plan would be able to receive a disbursement since they will no longer be employees of the two companies (and continuing control group) starting the new plan. 

Am I interpreting this correctly?

In-house attorney, that is probably what the intent is. Without reviewing the documents, facts, etc., I can't really give you specific legal advice. This forum is not really designed for that.

Good luck!