Severance From Employment Question

[Guest Grumpy456]

Corp. 1 sponsors a 401(k) Plan. Corp. 2 purchases 100% of the stock of Corp. 1. As of the purchase date, some of Corp. 1's employees continue to work for Corp. 1 and some immediately start working for Corp. 2. Corp. 2 assumes sponsorship of the 401(k) Plan formerly sponsored by Corp. 1. The individuals who remain employees of Corp. 1 continue to make 401(k) contributions to the plan (if they wish to do so) and if they have outstanding plan loans, they continue to make loan repayments through payroll deduction (as they did prior to the sale).

(1) Have the employees who continue to work for Corp. 1 had a "severance from employment"? My inclination is "no".

(2) Have the employees who, as a result of the sale, have gone to work for Corp. 2 had a "severance from employment"? I still think the answer is "no", but the answer seems less clear.

(3) If eventually Corp. 2 moves all of the former Corp. 1 employees to Corp. 2's payroll (and Corp. 1 continues on as a "shell"), have the former Corp. 1 employees had a "severance from employment" then? Given that Corp. 1 is a wholly owned subsidiary of Corp. 2, my guess is that the answer is still "no". The Corp. 1 employees may not be able to make additional contributions to the Corp. 1 plan, but whether an individual is entitled to make a contribution to a 401(k) plan and whether an individual is entitled to take a distribution from a 401(k) plan seem like separate and distinct questions.

Thanks in advance for any help.

[QDROphile]

You look at severance from the perspective of the entire controlled group, as a single employer. Movement from one corporation to another within the group is not a severance. Plan terms are very important as eligibility and contributions shift with the transitions, and it would be a good idea for the plan terms to confim.

[Guest Grumpy456]

The 401(k) regulations provide that an employee experiences a "severance from employment" when the employee ceases to be an employee of the employer maintaining the plan. Who is "the employer maintaining the plan"? There appear to be three possibilities: the employer maintaining the plan is (1) Corp. 1, (2) Corp. 2 or (3) a fictional entity consisting of Corp. 1 and Corp. 2. The 401(k) regulations are silent on this issue.

If I understand QDROphile correctly, "the employer maintaining the plan" is a fictional entity consisting of Corp. 1 and Corp. 2. If so, then distributions are not permitted to either (1) the Corp. 1 employees who stay with Corp. 1 or (2) the Corp. 1 employees who are transferred to Corp. 2. Is that about right?