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72(t) age 55 exception


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Folks:

I wasn't sure this belonged in this group (M&A) or in the DC group...so I started here. The below is as I understand the issue. I have simplified some things.

In the early 2000s (prior to EGTRRA and it impact on the same desk rule...later made "permanent by PPA), the company developed a JV with an unrelated company. Ownership in the JV was 50/50. Several hundred employees were moved from the company to the JV entity. The JV entity had/has its own benefit plans.

For purposes of the DC/Savings/Thrift plan benefit at the company from which these employees moved, the "term date" was coded as 1-1-01. If the participant was age 55 (or would be in that same calendar year...not sure if this nuance was used back then or not), the 72(t) exception to the additional 10% tax penalty for leaving at age 55 applied. If the participant was under that age, then that exception did not apply.

Recently a person who moved to the JV before age 55 but is now age 56 took his prior employer company benefit and objected to the distribution being coded such that it was an early distribution (i.e., no 72(t) age 55 exception).

So...the basic question is whether such a person could "grow" into the 72(t) for his prior employer benefit exception while at the JV? Did the same desk rule (in place when the JV was formed) but later repealed (but the plan could elect to retain it but did not do so in this case as far as I can tell) somehow impact this? EGTRRA replaced the separation from service concept with severance from employment....so that an employee who works at the same job for a different employer after a transaction can take a distribution from the prior employer's plan. I am not sure how that impacted the 72(t) age 55 eligibility

There has been some analysis of this matter where three revenue rulings were identified that applied the same desk rule to M&A transactions...RR 79-336, RR 81-141 and RR 80-129. RR 79-336 (the most helpful) discusses a distribution to an employee of corporation X, which had transferred its assets to corporation z, a wholly-owned subsidiary of corporation Y, in exchange for stock of corporation Y. The transaction resulted in the employee continuing at the same job but now working for corporation Z (and corporation Y). The IRS ruled that the since the employee remained in the same position for corporation Z after the acquisition of the former employer (corporation X), the distribution was not on account of the employee's separation from service. While this ruling discussed whether a separation from service had occurred for purposes of Code Section 402...but since the same words are used in 72(t) and 402, it seems that this ruling would apply to 72(t)...? Some secondary sources agree with this thought about the language applying to 72(t).

Hopefully, the issue I am getting at comes through here. It is complex and hopefully I articulated it well enough for any of you experts who have dealt with similar situation can recognize it and opine. Thanks.

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So...the basic question is whether such a person could "grow" into the 72(t) for his prior employer benefit exception while at the JV?

I'd say no. The language for the exception (from an IRS summary, not the regs) is "the employee separates from service during or after the year the employee reaches age 55." I'm assuming this is an in-service distribution...? That might be an important detail. Perhaps I'm looking to oversimplify it but it seems this is a simple issue that is clouded by someone with a misconception.

I'm also curious whether the participant did a rollover way back or if the plans were merged/spun off. I don't think it matters...

Ed Snyder

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