Odd separation from employment question

[Guest mfocke]

My DB plan was frozen years ago. The plan sponsor (G) decided they wanted to sell a major chunk of the company to raise cash. But the buyer (B) didn't want the pension liability on his books. So agreement was reached that B would remain an Employer under the plan but G would be too and G would fund the plan and B would have no liability.

Fast forward to September of this year when B decides they want to withdraw as an Employer/sponsor as allowed specifically under the plan and passes a corporate resolution and informs G that they are withdrawing from the plan.

I worked for G and continue to work for B.

I no longer work as an Employee of the Employer under the plan due to the withdrawal of B. I have achieved the age when early distributions are allowed and have the required combination of age and service. No dispute.

I applied for distribution. G said no.

Under the new rule of "Separation from Employment" (as opposed to the "same desk" rule), may I be treated for purposes of eligibility for distribution the same as if I worked for a third company (whose employees under the same eligibility criteria are entitled to receive distributions without dispute)?

In an article, I read that the definition of when distributions can be made is now "when the common law employment relationship with the "employer maintaining the plan" has been severed." Nothing about me having to be the one to sever the relationship as in this case my company B did it when it withdrew from the plan.

Needless to say, company G resists this notion citing vague IRS regulations though without any specifics.

Advice? References?

[saabraa]

The most on-point discussion of the IRS position that I'm aware of is GCM (General Counsel Memorandum) 39824. I'm confused and a little suspicious of the whole "now we're a sponsor.......whoops; now were not,"

scenario. I don't readily see anything that ever occurred to substantively make B a sponsor. Can't say I've seen it all by a long shot, but it sounds potentially like a sham for the very purpose of denying distributions.

The 401k discussion regarding separation from service, including the recent liberalizing change, isn,t relevant for a DB plan.

[Guest Pensions in Paradise]

The scenario you described doesn't sound right. Regardless, all you have to do is send a letter to the plan sponsor and state that you are formally requesting a distribution of your accrued benefits. The plan sponsor is required by law to inform you in writing if your benefit claim is denied, and the reasons for the denial. They cannot give you some vague explanation.

After you've received it, post the plan sponsor's explanation and someone here may be able to assist you in determining if its a valid denial.

[Guest mfocke]

The plan sponsor has sent me a formal letter of denial pending a ruling by the IRS. When I asked for a copy of the letter they sent to the IRS requesting the ruling, they replied that they had not yet sent the letter.

The chronology was:

9/8 Company B send a letter withdrawing as Employer and Sponsor.

9/26 I call the Insurance company administering the plan for Company G and request disbursment.

I am assigned a retirement collection date of 11/1 since they can't process my request fast enough to get me a check on 10/1 (so why should I pay for their inability?).

On 11/1, G formally denies my request again.

11/20 or so I receive the letter from G saying they haven't yet sent the letter asking for the ruling to the IRS.

They have not yet supplied me with any information citing the section of the code they are relying on for their concern that disbursment of funds would be inconsistant with IRS rules and since the plan was set up with specific language saying it should conform to IRS rules, they fall back on their vague concerns.

I have until 60 days to formally appeal. But appeal from what?

There are about 50 people in the same circumstances, BTW.

[Guest gdburns]

What is the Plan Sponsor's explanation?

It was suggested that you post whatever explanations you received so that someone could attempt a response. Without specifics, meaningful responses might be difficult.

[Guest mfocke]

Here is a portion of the letter I received from G, the sponsor of the plan and the Employer as defined in the plan.

“ Based on our review of the tax qualification rules of the Internal Revenue Code (“Code”) applicable to the plan, we have determined that the withdrawal of B as an employer maintaining the plan by itself does not constitute a distributable event under the tax qualification rules applicable to the plan. Therefore, since you continue to be employed by B, you are not entitled to a distribution of your pension benefits at this time.

We note that the Preamble to the Plan states that it is intended to meet the tax qualification requirements of section 401(a) of the Internal Revenue Code. Accordingly, any interpretation of the Plan terms must be made consistent with this purpose.

In particular, Treasure Regulation Section 1.401-1(b)(1)(i) provides that a pension plan within the meaning of section 401(a) of the code is a plan established 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.

The Internal Revenue Service has taken the position that this regulation prohibits a tax-qualified pension plan from distributing benefits prior to severance of employment – that is, prior to retirement, disability or death. IRS Revenue Ruling 56-693 states in relevant part as follows:

“A pension plan which permits the participants, prior to any severance of employment (e.g. retirement, disability or death) to withdraw all or part of the funds 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.

Accordingly, it is held that, although an employees’ qualified pension plan may provide benefits prior to normal retirement, such as disability or death benefits, which are only incidental to the main purpose of the plan, prior to any severance of their employment or the termination of the plan, to withdraw all or part of the funds accumulated on their behalf, in times of financial need or otherwise, will fail to meet the requirements of section 401(a) of the code”

We have not found any rulings or other guidance from the Internal Revenue Service that address the question of whether the withdrawal of an employer from the plan, absent any other corporate event or change in control group status, and absent termination of employment, can be treated by itself as a severance from employment under the regulation and revenue ruling cited above. In the absence of such guidance, the plan will not distribute benefits to any participant who continues employment with B.”

If I were still employed with company M, I would be entitled to receive benefits at age 62 without retiring from any company. The result of their interpretation is, since I am not an Employee of the Employer as those terms are defined within the plan, the B employee is treated differently than the company M employee even though none of them has occasioned retirement, disability or death.

[Guest Pensions in Paradise]

mfocke - the response for the plan sponsor is in no way vague, they specifically state that in their opinion the withdrawal of B as a participating employer is not a distributable event under the plan. Therefore, if you feel you are entitled to a distribution, you should retain legal counsel to assist you.