HELP! Same Desk Rule Blues

[Guest Adam1]

I was employed at Company A and an active participant of their 401K plan. Company B purchased a division of Company A in March of this year. I went to work for Company B in a similiar position. Company B has a 401K plan. My past employer cited 3 letter rulings and denied distribution of my 401 funds on deposit in their plan. In May of this year Company A changed plan providers. I had no choice and transferred funds. I just received notice from Company A that they now will allow a "Direct" transfer of funds to Company B's plan or let it reamain on deposit in Company A's plan. Did some major change occur to laws that govern this happen in the past few months? Or is Company A just trying to fix a mistake? I took a "hit" on load fees when assets were transferred in May. Do I have any recourse to recover funds? My preferance is to roll it over to an IRA as both plans are expensive. Is there a difference between a direct transfer and rollover?

[Guest ERead]

When your original company was purchased, you were put into the "same desk" rule and not allowed a distribution, as there was no "distributable event" to require the plan to offer a distribution of the funds.

The change in providers was beyond your control unfortunately, and you have no real venue to recover lost funds.

The third situation is separate altogether - a merger of the two 401(k) plans - sounds as though they set it up so you only have the option of directly rolling into the new plan, or leaving your funds where they are. Again - there truly is no distributable event here to allow you to roll to an IRA at this point.

Hope that clarifies things a bit - anyone have a different twist to throw in?

Good luck.

[LCARUSI]

It would have been nice if they offered you the opportunity for a direct transfer from Plan A to Plan B before they changed service providers for Plan A and, therfore, before you took the "hit" on load fees on the investment changes in Plan A.

But now you have already absorbed the hit. It seems to me you have two choices: stay in plan A or direct transfer to plan B. You want a third choice; withdraw your account and establish an IRA.

You should check the Plan document. Maybe you can take an in-service withdrawal for part of your account (e.g. matching contributions or profit sharing funds) and get those funds into an IRA.

But you won't be able to get the 401(k) part of your account out of the Plan (Plan A or Plan b) until you have a distributable event (for 401(k) purposes).

And yes, a direct transfer is different from a direct rollover. The direct transfer is not a distribution - it is a transfer of assets and liabilities from one plan to another at the sponsor level.

[This message has been edited by LCARUSI (edited 11-09-98).]

[Guest Big John]

Seems to me that you overlooked the possibility that there was a sale of substantially all of the assets of a company or division. A sale of substantially all the assets of a company or division is a distributable event and supercedes the Same Desk Rule. I don't remember the exact cite but it is definitely described in detail in the 401(k) regulations (and the Code too, I think).

[LCARUSI]

I don't think we overlooked the possibility of a sale of substantially all the assets....

The discussion is based on the Company's position and assertion that Adam1 is subject to the same desk rule. If he isn't, there's no problem. He takes a distribution and rolls it into an IRA - end of story.

[This message has been edited by LCARUSI (edited 11-10-98).]

[Guest AnthonyF]

This is a very complex issue, and one I do not believe can be answered in a couple of short paragraphs. The "same desk" rule considers that if an employee continues to do substantially the same job, but for a different employer, after a change in ownership of the former employer there is not a separation of service creating a distributable event.

I think Big John's point is that §401(k)(10) and Treasury Reg. 1-401(k)-1(d) create the possibility for a distribution if certain requirements are met. One of the most important issues to consider when determining if there is a distributable event under §401(k)(10) and Treasury Reg. 1-401(k)-1(d) is that the purchaser in no way maintains the plan of the seller after the disposition, thus creating successor plan issues.

This is a facts and circumstances based issue and without knowing all of the facts surrounding the purchase of the division of Co. A by Co. B it will be very difficult to determine whether there is a distributable event.

I don't know which Private Letter Rulings your past employer cited to you, but if you would like to read a PLR that gives an example of a situation that creates a distributable event under §401(k)(10) PLR9618025 is a good example.

[Guest Adam1]

Thank you all for your input. I do believe I am entitled to a distribution because substantially all of the assets of my division were sold. I am in the process of obtaining information from my current employer to discover what their position is. From an employers standpoint is there any advantage to doing a direct transfer rather then a distribution. Are the tax filings more complex in a distribution? Where can I find PLR9618025?

[Guest Gary Tencer]

Private Letter Ruling 9618025, IRC Sec(s). 401(k)

Full Text:

Date: February 5, 1996

Dear ***

This is in response to your request for a ruling, dated October 23, 1995, and supplemented by a letter dated December 13, 1995, submitted by your authorized representative concerning distributions from a plan described in section 401(k) of the Internal Revenue Code and qualified under section 401(a) of the Code.

Corporation A maintains Plan X, a profit-sharing plan which incorporates a cash or deferred arrangement as described in section 401(k) of the Code, for the benefit of its employees. You represent that Plan X is qualified under section 401(a) of the Code.

Corporation A operates it [sic] various businesses through eight major subdivisions (Division B, Division C, Division D, Division E, Division F, Division G, Division H, and Division I). Corporation A's principal place of business is in Location O.

Most of Corporation A's business units involve sales of products to industrial and commercial users. Certain products produced by Divisions B, F, H, and I are produced for resale to consumers. Each of these businesses historically have sold their consumer products using separate marketing and sales forces and had separate management.

Unit K, a part of Corporation A, was sold to Corporation B, an unrelated corporation, in September 1995. At the time of the sale, Unit K, whose employees participate in Plan X, was part of Business L of Division H and employed approximately 25 percent of the total employees in Business L. Unit K was the only Corporation A business unit located in Location P, and was distinguished from other businesses in Division H in that it did not produce an end product, but produced an intermediate product that was used by others to produce end products. Unit K manufactures and sells medical devices, proprietary plastic disposable products containing preservative solutions which are used for the collection of whole blood and plasma. The blood and plasma so collected are then processed by others to produce end products that are used for the treatment of patients. In producing such medical devices, Unit K was different from the rest of Business L which produced drugs rather than medical devices.

Unit K manufactured its products at Location P at its own separate manufacturing and management facilities and was a decentralized unit of Division H. Unit K maintained its own separate management, accounting and financial function. More particularly, it did its own advertising, hiring and firing and had a separate work force which included production, clerical, management and executive employees. Unit K had a separate accounting function for manufacturing, cost accounting, payroll and accounts payable.

The sale consisted of 100 percent of Unit K, and included the manufacturing and office facilities at Location P and all supplies and inventory. Unit K at the time of the sale employed approximately 426 employees. As a result of the sale, all of the 426 employees were offered reemployment by Corporation B at their same salaries and positions and were informed that Plan X distributions will be made if the ruling requested herein is granted.

Based on the foregoing, you request a ruling that the sale by Corporation A of Unit K resulted in a disposition by Corporation A of substantially all the assets used by it in a trade or business within the meaning of section 401(k)(10)(A)(ii) of the Code, and therefore distributions to former employees will not adversely affect the tax treatment of salary deferrals under Plan X under section 402(e)(3).

Section 402(e)(3) of the Code provides that contributions made by an employer on behalf of an employee to a trust which is a part of a qualified cash or deferred arrangement (as defined) in section 401(k)(2) shall not be treated as distributed or made available to the employee nor as contributions made to the trust by the employee merely because the arrangement includes provisions under which the employee has an election whether the contribution will be made to the trust or received by the employee in cash.

Section 401(k)(2)(B)(i)(II) of the Code, when read together with section 401(k)(10)(A)(ii) and section 1.401(k)- 1(d)(1)(iv) of the Income Tax Regulations, states that amounts attributable to elective deferrals may not be distributed from a cash or deferred arrangement before the date of the sale or other disposition by a corporation of substantially all its assets (within the meaning of section 409(d)(2)) used by the corporation in a trade or business of the corporation to an unrelated corporation, but only with respect to an employee who continues employment with the corporation acquiring such assets.

Section 1.401(k)-1(d)(1)(iv) of the regulations provides in relevant part, that amounts attributable to elective contributions are not distributable earlier than upon the date of the sale or other disposition by a corporation of substantially all of the assets (within the meaning of section 409(d)(2) used by the corporation in a trade or business of a corporation. Section 1.401(k)-1(d)(4)(iv) states that, for purposes of section 1.401(k)-1(d)(1)(iv), the sale of “substantially all” the assets used in a trade or business means the sale of at least 85 percent of the assets.

It has been represented that Unit K is a geographically separate business, engaged in the manufacture of a particular product line. Unit K has historically been treated as a separate business and has a separate marketing and sales force and separate management. Unit K is responsible for its own advertising, and is responsible for its own personal decisions. As such, we conclude that Unit K constituted a trade or business of Company A within the meaning of section 401(k)(10)(A)(ii) of the Code.

In this case, Corporation A sold to Corporation B 100 percent of Unit K's assets. All of the employees of Unit K were offered reemployment by Corporation B.

Accordingly, we conclude that the sale by Corporation A of Unit K resulted in a disposition by Corporation A of substantially all the assets used by it in a trade or business within the meaning of section 401(k)(10)(A)(ii) of the Code, and therefore, if the other applicable requirements set forth in section 1.401(k)-1(d)(4) are met, distributions to former employees will not adversely affect the tax treatment of salary deferrals under Plan X under section 402(e)(3).

This ruling is based on the assumption that Plan X is qualified under section 401(a) of the Code at the time of the transaction.

A copy of this ruling has been sent to your authorized representative in accordance with a power of attorney on file in this office.

Sincerely yours,

Frances V. Sloan

Chief, Employee Plans

PLR 9835040

Technical Branch 3

Date: June 2, 1998

Dear ***

This is in response to a request for a ruling submitted by your authorized representative dated June 3, 1997, concerning the ability of certain qualified plans to make or commence distributions to former participants. The request was supplemented by a letter dated November 14, 1997, and February 16, 1998.

Company A owns 100% of the stock of two subsidiaries: Subsidiary Management Company B and Subsidiary Management Company C. Subsidiary Management Company B provides traditional property management services to owners of office buildings and industrial properties, such as engineering, leasing and construction. Subsidiary Management Company C provides property management, leasing and development services to regional shopping malls. In providing these services, both Subsidiary Management Company B and Subsidiary Management Company C enter into management agreements with the entity desiring such services.

Subsidiary Management Company B and Subsidiary Management Company C each maintain accounting, payroll and national marketing functions at their respective corporate headquarters for all properties that they manage. In the field, each property managed by Subsidiary Management Company B or Subsidiary Management Company C is run as an indiv

[Guest]

[Wessex]

I concur with the preceding comments regarding the same desk rule and 401(k)(10) distributions. However, keep in mind that even if the transaction met the requirements of 401(k)10) in all respects, there would be no distributable event unless the plan document provided for distributions pursuant to 401(k)(10). Many plans do provide for these distributions, but a plan is not required to provide them.

[This message has been edited by Wessex (edited 11-20-98).]