401(k) plan for a controlled group of several auto dealerships - EmployerA/Plan A. One of the auto dealerships was purchased by an individual (lock, stock and cars) from Employer A, creating Employer B.

After the purchase Employer B continued to take out deferrals from employees (previously participants in Plan A) for aprox. 1 month. Employer A/Plan A refused to take those deferrals and not willing to allow Employer B in their plan. Employer B has not yet established their own 401(k).

Shouldn't the deferrals (and earnings) taken from Employer B's employees be returned to them, since Employer B has no plan which even allows these employees to make deferrals? All of this has happended so far in 2005. Any alternatives?

Return the deferrals

Give deferrals back and quickly set up plan. Employees can not make deferrals to a plan until one has been adopted and set up. The sooner you get it going the sooner the employees will be happy.

I'd add that deferral elections made under plan A are not valid for plan B.

There's probably an interesting question here: can you have a prohibited transaction here for failure to submit the contributions in a timely manner to the plan, if there is no plan?

RCK

Others may disagree, but I suggest you process a negative deferral in your payroll system, and let the payroll system take care of the tax withholding issues.