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Stock sale - distributable event?


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Company A owns 100% of Sub 1 & Sub 2.  Sub 1 & Sub 2 sponsor a DB plan that requires a separation from service to receive retirement benefits.  Sub 2 is sold to an unrelated party and leaves the controlled group.

Can those employees of Sub 2, who have attained early retirement age, receive a distribution, even if they are still employed by the company formally known as Sub 2?  

Does the sale to an unrelated party result in separation from service and permit the plan to pay the distributions? 

 

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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This was a point of contention about 10 to 15 years ago.  Right now, a severance of employment would be deemed to exist under this circumstances unless the purchaser of sub 2 actually agrees to take over sponsorship of the sub 2 part of the plan.

So, if the purchaser of sub 2 say "Hey, we're buying this division (or subsidiary), but we want nothing to do with the plan, and it will remain with the sponsor", then this will be considered a severance of employment for all sub 2 employees who are now employed with the purchaser.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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Thank you.  That is exactly what is happening.  The Plan (and all Sub 2 benefit liability) is staying with Sub 1.  

Can you point me towards anything official that I can show the attorney? 

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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Maybe this will help?

 

GCM, PEN-RUL 17,524, G.C.M. 39824, July 6, 1990.

G.C.M. 39824, July 6, 1990.

Qualified plans: Distributions: Terminations: Corporate dispositions

The conditions under which an employer may make distributions from a qualified pension plan depend on what constitutes a severance from employment. The IRS expressed the opinion that a determination whether a severance from employment has occurred should be made on the basis of whether or not the employee continues to be employed by the employer maintaining the plan and not on whether the employee continues to work on the same job for a different employer. Back reference: ¶See Finding Lists.

ROBERT I. BRAUER

Assistant Commissioner

(Employee Benefits and Exempt Organizations)

Attention: Director, Employee Plans Technical and Actuarial Division

This memorandum is in response to your request of September 29, 1989 for formal consideration of your proposed technical advice.

FACTS

a. * * * * *

Employer Z, a parent company, maintains a defined benefit pension plan, Plan X. Under the terms of Plan X, a participant may become eligible to receive a monthly retirement benefit after his "severance." A "severance" is defined in Plan X to mean an employee's voluntary or involuntary termination of employment with Employer Z and its affiliated companies. An "affiliated company" is defined by Plan X as (1) any corporation which is a member of a controlled group of corporations with Employer Z (within the meaning of section 414(b) of the Code), (2) any partnership, joint venture or other business organization (whether or not incorporated) which is under common control or is affiliated with Employer Z (within the meaning of section 414©) or (3) any member of an affiliated service group within the meaning of section 414(m) of which Employer Z is a member.

Employer Z proposes to amend Plan X to provide that in the event of a sale by Employer Z to a purchaser other than an affiliated company of (i) all or substantially all of the assets used by the Employer Z in a trade or business or (ii) Employer Z's interest in a subsidiary, a severance will occur on the date of such sale with respect to an employee who continues in employment with the corporation or other person acquiring such assets or with such subsidiary, as the case may be, unless the purchaser agrees in connection with the sale to be substituted for Employer Z as the sponsor of Plan X or to establish a defined benefit plan that is qualified under section 401(a) to which plan assets in the amount of the employee's benefit under Plan X will be transferred.

b. * * * * *

Corporation Q and its subsidiaries were acquired by Corporation R. They are now members of the controlled group that includes Corporation R and its subsidiaries. Before the acquisition, Corporation Q and certain of its subsidiaries had adopted a pension plan for their employees, Pension Plan P. Since their acquisition by Corporation R, they have continued to maintain Pension Plan P.

Pension Plan P provides for the distribution of benefits upon an employee's termination of service prior to normal retirement age. Pension Plan P defines termination of service, in relevant part, as the voluntary or involuntary severance of employment with the employers included in the Plan (except by reason of death, retirement, temporary layoff, or leave of absence) and any other change in an employee's status resulting in his no longer being an employee. However, Pension Plan P provides that a termination of service does not occur upon the transfer of an employee to Corporation R or any employer under the direct or indirect control of Corporation R (or Corporation Q for the period prior to its acquisition by Corporation R).

Pension Plan P defines employee, in relevant part, as a person in a common law employee-employer relationship with an employer included in the Plan, i.e., Corporation Q and subsidiaries that have adopted Pension Plan P (certain former subsidiaries of Corporation Q). Pension Plan P defines employer maintaining Pension Plan P, as employers included in the plan, and Corporation R and the companies under its control that have not adopted Pension Plan P.

Corporation R proposes to amend Pension Plan P to further define termination of service. Termination of service would occur when an employee ceases to be an employee of an employer maintaining Pension Plan P as a result of certain enumerated business dispositions, notwithstanding the fact that the employee is employed by a subsequent employer, as defined. The enumerated business dispositions are: 1) sale or other transfer to a subsequent employer of all or substantially all the assets used in a trade or business of an employer maintaining Pension Plan P 2) liquidation, sale or other means of terminating the parent-subsidiary or controlled group relationship with Corporation R of an employer maintaining Pension Plan P; (3) liquidation, sale or other means of terminating treatment of an employer maintaining Pension Plan P as a single employer with Corporation R pursuant to section 414(b); (4) loss or expiration of a contract with a government agency by an employer maintaining Pension Plan P and entry into such contract by a subsequent employer; (5) sale or other transfer to a subsequent employer of all or substantially all the assets of a plant, facility, or other business location of an employer maintaining Pension Plan P; and (6) any other sale, transfer or disposition of assets of an employer maintaining Pension Plan P to a subsequent employer.

The proposed amendment defines subsequent employer to be an employer that is not maintaining Pension Plan P and that is not in a subsidiary, controlled group, or single employer relationship with Corporation R. The proposed amendment does not differentiate between distributions in the case of a sale of stock or assets of the employer maintaining the plan in conjunction with a transfer of assets in the plan to a plan of the purchaser and distributions in the case of a sale without such transfer of assets.

ANALYSIS

We agree with your conclusion that the term "severance from employment," as used in Rev. Rul. 56-693, 1956-2 C.B. 282, for purposes of determining whether a pension plan qualified under section 401(a) may make distributions, does not have the same meaning as "separation from the service," as used in section 402(e)(4)(A)(iii) for purposes of determining whether a distribution is a "lump sum distribution." A determination as to whether a severance from employment has occurred should be made on the basis of whether or not the employee continues to be employed by the employer maintaining the plan (determined using the criteria described below) rather than on the basis of whether the employee continues to work on the same job for a different employer as a result of a liquidation, merger, or consolidation, etc.

Section 401(a) provides that a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under that section if it meets the requirements provided therein.

Treas. Reg. S1.401-1(b)(1)(i) provides that a pension plan within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement.

Rev. Rul. 56-693, 1956-2 C.B. 282, as modified by Rev. Rul. 60-323, 1960-2 C.B. 148, construing the definition of a pension plan in Reg. S1.401-1(b)(1)(i), reasons that a pension plan which permits participants, prior to any severance of employment (e. g., retirement, disability, or death) to withdraw all or part of the funds (other than their own voluntary contributions) accumulated on their behalf is inconsistent with the accepted concept of a pension plan which meets all of the requirements of section 401(a) of the Code. Consequently, Rev. Rul. 56-693 holds that, although an employee's qualified pension plan may provide benefits prior to normal retirement, such as disability and death benefits, which are only incidental to the main purpose of the plan, an employee's pension plan that permits the participants, prior to any severance of their employment or termination of the plan, to withdraw all or a part of the funds (other than their own voluntary contributions), accumulated on their behalf, in times of financial need or otherwise, will fail to meet the requirements of section 401(a).

Section 402(e) provides special tax treatment (five-year averaging) for certain lump sum distributions. Section 402(e)(4) generally defines lump sum distributions as the distribution or payment within one taxable year of the recipient of the balance to the credit of the employee which becomes payable to the recipient (i) on account of the employee's death, (ii) after the employee attains age 59 1/2, (iii) on account of the employee's separation from service, or (iv) after the employee has become disabled (within the meaning of section 72(m)(7)).

Rev. Rul. 79-336, 1979-2 CB 187, updating and restating Rev. Rul. 72-440, 1972-2 CB 225, provides that an employee will be considered separated from service within the meaning of section 402(e)(4)(A) of the Code, only upon an employee's death, retirement, resignation or discharge, and not when the employee continues on the same job for a different employer as a result of the liquidation, merger, or consolidation, etc., of the former employer.

Rev. Rul. 81-141, 1981-1 CB 204, updating and restating Rev. Rul. 58-99, 1958-1 C.B. 202, addresses the issue of when a separation from service occurs in the case a stock transfer rather than an asset transfer. Under the facts in that ruling, control of S Corporation was obtained by other interests under which it continued to operate as a taxable entity. The profit-sharing plan maintained by S Corporation was at that time discontinued as to the employees of S Corporation. The ruling provides that the employees who remain employees of S Corporation have not separated from service for purposes of section 402(e) because such employees did not retire or resign and were not discharged from employment.

One of the principles that underlies the definition of pension plan in Reg. S1.401-1(b)(1)(i) and thus is relevant in construing the term "severance from employment" as used in Rev. Rul. 56-693 is that only employees (within the meaning of section 401) of the employer maintaining a pension plan may benefit under the plan. Treas. Reg. S1.401-1(b)(1)(i) provides that a pension plan is a plan maintained by an employer to provide benefits to his employees. Consequently, when the employment relationship between an employee and the employer maintaining a pension plan is severed before the employee retires, a distribution of benefits to the employee from that pension plan after severance of the employment relationship with that employer is not inconsistent with the concept of a pension plan that meets all of the requirements of section 401(a). However, the determination of whether the employment relationship between an employee and the employer maintaining the plan has been severed is not based simply on whether, under common law, the employee has terminated employment with the employer. The rules for making this determination must be consistent with the provisions of section 401(a) and the definition of pension plan in Reg. S1.401-1(b)(1)(i).

In determining whether the employment relationship with the employer maintaining the plan has been severed for purposes of section 401(a), the employer includes all members of any controlled group as defined in section 414(b); partnerships, proprietorships, etc., under common control as defined in section 414©; and members of an affiliated service group as defined in section 414(m), of which the employer maintaining the plan is a member. Each of these sections provides that all employers described in that section are generally treated as the same employer for purposes of sections 401(a), 408(k), 410, 411, 415, and 416. Consequently, if the employer of an employee changes from the employer maintaining the plan to another employer who is treated as the same employer pursuant to section 414(b), ©, or (m), no severance from employment will be treated as having occurred for purposes of section 401(a).

Further, a severance of employment does not always occur when the common law employer of an employee changes to an employer that is not treated as the same employer of the employee pursuant to section 414(b), ©, or (m). If the new employer is substituted as the sponsor of the former employer's pension plan (or the subsidiary now under the control of a new parent retains the plan) or there is otherwise a transfer of plan assets and liabilities relating to any portion of the employee's benefit under the pension plan of the employee's former employer to a plan being maintained or created by the new employer, then the employment relationship with the employer maintaining the plan has not been severed with respect to that employee.

Section 414(1) generally provides that in the case of a transfer of assets or liabilities to a plan, in order for the plan to which the assets are transferred to be qualified under section 401(a), each participant in the plan must be entitled (if the plan then terminated) to receive a benefit immediately after the transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the transfer (if the plan had been terminated). Consequently, in the case of a transfer of assets and liabilities, the new employer has stepped into the shoes of the old employer with respect to the portion of the plan represented by the assets and liabilities transferred and is now treated as the employer maintaining the pension plan of the former employer with respect to that portion of the plan.

However, in some cases, there may be a transfer of assets and liabilities to a plan of the new employer that are attributable to the benefits of only some of the former employer's employees who become employed by the new employer. Assets and liabilities attributable to the benefits of other employees who become employed by the new employer remain in the plan of the former employer. For those employees with respect to whom the assets or liabilities attributable to their benefits were not transferred to a plan of the new employer, the new employer is not treated as maintaining the plan of the former employer.

If the new employer of an employee is not treated as the same employer as the employee's former employer under section 414(b), ©, or (m), and the new employer is not treated as maintaining the pension plan of the former employer with respect to the employee, a severance of the employment relationship between the employee and the employer maintaining the plan may be found to have occurred even though the employee has not separated from service for purposes of section 402(e). In the case of a liquidation, merger, or consolidation, etc., of an employee's employer, severance of the employment relationship with the employer maintaining the plan may be found to have occurred even though the employee continues at the same job with the new employer.

Further, a severance of the employment relationship between an employee and the employer maintaining a pension plan may also be found to have occurred for purposes of section 401(a) under certain circumstances when the stock in a subsidiary is sold by a parent (resulting in loss of control) even though there is no change in the common law employer of the employee. A severance of employment with respect to the employees of the subsidiary will be found to have occurred for purposes of section 401(a) if three conditions are met: the pension plan continues to be maintained by the original parent but is no longer maintained by the subsidiary in the hands of its new owner; no assets or liabilities are transferred to the subsidiary in the hands of the new owner or to any other employer who is treated as the same employer as the subsidiary under 414(b), ©, or (m); and the subsidiary in the hands of the new owner is not treated as the same employer as the original parent under section 414(b), ©, or (m). If these conditions are met, the pension plan is no longer being maintained by the subsidiary for the benefit of that employee.

As a result, we concur generally with your conclusion in the proposed technical advice memorandum that Employer Z should be permitted to amend Plan X to allow distributions to employees who become employed by an unrelated employer (an employer who is not an affiliated company) upon the sale of (i) all or substantially all the assets used by the Employer Z in the employing trade or business, or (ii) Employer Z's interest in the employing subsidiary, unless the purchaser agrees in connection with the sale to be substituted for Employer Z as the sponsor of the defined benefit plan or to establish a defined benefit plan to which plan assets and liabilities representing the employees' benefits under Plan X will be transferred. The amendment generally only permits distribution when an employee is no longer employed by the employer maintaining the plan based on the criteria described above and, thus, only after a "severance of employment" has occurred. However, the amendment should be revised to clarify that a severance of employment will not occur on the date of sale in the case of any employee with respect to whom assets and liabilities attributable to his benefits under Plan X are transferred to any plan of the new employer regardless of whether it is a new plan or a pre-existing plan of the former employer.

Further, although we agree with your conclusion that the definition of separation from the service for purposes of section 402(e) should not be used for purposes of interpreting termination of employment for purposes of determining whether a pension plan is permitted to make distributions, we do not agree with the analysis in your proposed technical advice memorandum. The technical advice memorandum should be revised to reflect the analysis in this memorandum.

We also concur with your conclusion that the amendments submitted by Corporation R are not acceptable because Pension Plan P, as amended, would automatically permit distribution to employees after certain business dispositions that cause the employer of those employees to no longer be a member of the controlled group that includes Corporation R. The amendment does not prohibit distribution to those employees when the new employer is substituted as the sponsor for the plan (or, in the case of a stock sale, the subsidiary in the hands of the new owner continues the plan) or there is a transfer of assets and liabilities to a plan of the new employer which represents the benefits of those employees.

Further, the definition of "subsequent employer" should be clarified to insure that it does not include any employer that is (1) a corporation which is a member of a controlled group of corporations with Corporation R (within the meaning of section 414(b) of the Code), (2) a partnership, joint venture or other business organization (whether or not incorporated) which is under common control or is affiliated with Corporation R (within the meaning of section 414©) or (3) any member of an affiliated service group within the meaning of section 414(m) of which Corporation R is a member.

JAMES J. McGOVERN

Assistant Chief Counsel

By: MARY E. OPPENHEIMER

Deputy Assistant

Chief Counsel

(Employee Benefits and

Exempt Organizations)

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Perfect!  Thank you.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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You're welcome. Also, if it helps, I just took a look at the EOB, and Sal has a footnote that IRS Notice 2002-4 has a discussion that supports the view that the IRS is still applying the principles in the GCM above.

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