The Same Desk Rule

[Guest David Thomas]

Has anybody seen a well-written article about the same-desk rule. I have been looking for something to send to a client (a bright client who knows nothing about the same-desk rule).

[LCARUSI]

Take a look at Tax Facts #1 (1998).

Q&A 350 gives a nice clear discussion of the issue and several relevant citations.

[Guest kp]

See also, Elinor R. Merl, "Plan Administration, Administering the Same Desk Rule." Journal of Pension Benefits. -- not sure of the date.

[Guest Gary Tencer]

Recent PLR on same desk rule.

Following from E&Y

Tax Alert

09/23/98

Compensation and Benefits

IRS Ruling Highlights Conditions Necessary for Section 401(k) Distributions Following Corporate Transactions

Private Letter Ruling 9837034 discusses some of the provisions permitting distributions from Section 401(k) plans and shows that not all employees who separate from service on account of corporate transactions will be eligible to receive distributions. Sponsors should carefully consider whether former participants meet the requirements entitling them to Section 401(k) plan distributions following a corporate transaction.

Background

Generally, distributions from Section 401(k) plans are only permitted upon separation from service, death, disability, or attainment of age 59½. In determining whether an employee has separated from service for purposes of favorable tax treatment on distributions under Section 402, Rev. Rul. 79-336 and 80-129 together provide that an employee is considered separated only upon death, retirement, resignation, or discharge and not when the employee continues on the same job for a successor employer. This is known as the "same desk" rule.

Under Section 401(k)(10)(A)(ii), distributions are also permitted where a company sells 85% of the assets used in a trade or business, but only for employees who continue to work for the company purchasing the assets which does not assume part or all of the plan.

PLR 9837034

Company maintains a profit-sharing plan that includes a cash or deferred arrangement under Section 401(k). The plan provides that, upon sale of substantially all of Company's assets in a trade or business, an employee may elect to receive a lump sum distribution of all benefits due to the employee, provided the employee is hired by the company acquiring the assets.

Company has a Subsidiary which operates a business conducted through separately maintained business units, E and F. Company entered into an asset purchase agreement with Company B, an unrelated corporation, to buy Unit E. The assets sold consisted of over 85% of the assets used by Subsidiary in Unit E. Company B will not maintain or participate in Company's profit sharing plan.

Company also decided to discontinue the maintenance of its older computer systems and entered into a service agreement with Company G (an unrelated corporation) to provide this service. As a result of the agreement, Company fired the Unit E employees who maintained the computer systems and Company G hired many of the affected employees at a base salary at least at great as that paid to the employees by Company. In order to maintain Company's computers under the service agreement, the rehired employees were guaranteed access to Company's facilities. The affected employees will be subject to Company G's benefit programs and will report to Company G supervisors.

The Service ruled that the sale of Unit E by Company resulted in a disposition of substantially all the assets used by it in a trade or business and qualified under Section 401(k)(10)(A)(ii). However, the Service ruled that plan distributions made to employees who were discharged by Company and then rehired by Company G to perform the same function will not be considered made upon a separation from service within the meaning of Section 401(k)(2)(B)(i)(l) due to the "same desk" rule.