How to avoid a splitting headache.

• Author: Riebold, Mary S.
• Position: Dividing pension-plan assets - Pension Fund Management

Dividing pension-plan assets during a sale is often confusing and potentially costly. The trick is to get your assumptions right.

It's just like a scene from a long-running play. The exhausted negotiators for a corporate sale have one more wrinkle to iron out: splitting the pension benefits to be transferred from the seller's plan to the buyer's. But there's a twist in the action. No one knows how much of the assets to transfer along with the benefits. As the other players wait in the wings, the negotiators cast about frantically for guidance.

Many business divestitures or acquisitions involve the transfer of employees from the seller's pension plan to the buyer's plan. When the time comes to divide pension liabilities and plan assets, a process called a spinoff, the basis for determining the amount of assets can be the most bitterly contested section of the sale agreement. Unfortunately, the negotiating teams may be unaware of the effect of legal restrictions on the transfer amount, so the final calculations could topple the most carefully crafted compromise.

Current regulations aren't much help. The Employee Retirement Income Security Act and the Internal Revenue Code provide only theoretical guidelines. As a result, it's usually up to the actuary for the seller's plan to declare the transfer in compliance with the law and the IRC. Therefore, actuarial assumptions are the tools for enlarging or shrinking an asset transfer, and selecting them requires expertise in spinoffs, discretion and cautious advocacy.

Pension-plan spinoffs are governed by Sections 208 of ERISA and 414(1) of the IRC. These require you to ensure that participants in both the spinoff group and the remaining group are as well-protected if the plan were to terminate after the spinoff as they would be if the plan had done so immediately before. If the original plan is fully funded on a termination basis, both segments must remain that way after the spinoff. In a corporate sale, surplus assets can be allocated with total discretion, subject to any special restrictions in the plan document.

TREAD CAREFULLY

The quandary is ascertaining how much money your company needs to fully fund the hypothetical plan termination. A financial executive might expect that the accumulated-benefit obligation (roughly equivalent to the value of accrued benefits) under SFAS 87 would be appropriate, while an ERISA attorney might seek the answer in the regulations under IRC 414(1). However...