(b)lines Ask the Experts – Spinning Off a Related Entity

“In terms of our 403(b) plan, will we have any continuing responsibilities with respect to these employees?”    

Michael A. Webb, vice president, Retirement Plan Services, Cammack LaRhette Consulting, and David Powell with Groom Law Group answered:  

First of all, we should point out that such transactions are often extremely complicated with retirement and other benefit implications that are far beyond the scope of this column. Thus, any plan sponsor contemplating a spinoff or other divestiture of any entity should consult with benefits counsel who is well versed in such transactions.    

Having said that, you will have continuing responsibilities with respect to participants after the transaction has closed. The reason for this is, unlike a 401(k) plan where it is possible that assets of a organization that is spun off could be segregated from the trust and moved to the plan of the new plan sponsor, in a 403(b) plan this is often not possible unless the contracts or agreements typically allow for it. The reason for this is the nature of 403(b) investments, where assets are not held in a trust, but in annuity contracts and/or custodial accounts.    

When your employees become employed by the new plan sponsor, they will direct future contributions to the new sponsor’s plan, but existing account balances will remain in your plan until the employee elects to distribute such assets and/or roll over such a distribution to the retirement plan of the new employer. Thus, such accounts will need to be administered is a fashion similar to those of other terminated employees; though no new contributions are made to such accounts, all of the administrative requirements applicable to plan participants (including the reporting and disclosure requirements of ERISA, if your plan is subject to ERISA), would apply to these “spun off” participants as well.    

One word of caution: although these employees will now be working at a new entity, you will want to confirm with benefits counsel that such employees will be experiencing a “termination of employment” for purposes of receiving a 403(b) plan distribution. This should indeed be the case, but some of these transactions can be quite complex. If there is no termination of employment, participants are not entitled to a distribution from their existing 403(b) plan until such time that a termination of employment or other qualifying event occurs.   

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.