Same Desk Rule

[Guest MonicaS]

To make a long complicated issue short I have a client who sold an auto franchise back to the manufacturer and is opening a used car lot at the same location. They are experiencing partial plan termination but want to allow the participants who will be staying on with the "used lot" to take a distribution.

We are looking at the options this client may have as far as allowing participants to take a distribution. I have read up on the 'same desk' rule and concluded that there has been no separation of service for these employees. I am unsure of how Rev Rule 2000-27 changed this rule. In your opinion would the closing of a franchised car lot and the opening of a used car lot constitute a 'separation of service' for participants who remain employees of the "new business" if the plan remains in tact?

Thanks!

[Kevin C]

EGTRRA modified the same desk rule for plan years beginning after 12/31/2001. You may find 1.401(k)-1(d)(1) & (2) helpful.

(1) General rule. --A cash or deferred arrangement satisfies this paragraph (d) only if amounts attributable to elective contributions may not be distributed before one of the following events, and any distributions so permitted also satisfy the additional requirements of paragraphs (d)(2) through (5) of this section (to the extent applicable) --

(i) The employee's death, disability, or severance from employment;

(ii) In the case of a profit-sharing, stock bonus or rural cooperative plan, the employee's attainment of age 591/2, or the employee's hardship; or

(iii) The termination of the plan.

(2) Rules applicable to distributions upon severance from employment. --An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee's new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of section 414(I)) with respect to the employee.

There should be something about this in the plan document, or in the good faith EGTRRA amendment if the plan has not yet been restated for EGTRRA. Our good faith EGTRRA amendments allowed a choice of applying the new rules or keeping the old ones. What does the plan document say?

Who was the plan sponsor before the sale? Who is the plan sponsor after the sale?

[J Simmons]

Check the language of your EGTRRA amendments carefully. The IRS published model amendment for EGTRRA good-faith purposes continued to use the term 'separation from service' despite EGTRRA changing it. See for example, IRS Notice 2001-57, section 2.2.1.

[Guest MonicaS]

Thank you for the help! Just looking for clarification on my findings below.

In Article X of the EGTRRA Amendment for this particular Plan, it uses the term "severance from employment" not separation from service. Is this my answer?

The Plan Sponsor is the same person, just the name and nature of the business changed.

To make this even more complex, this client is also part of a controlled group. The other member of the controlled group sponsors a separate plan. From what I can gather there would be no "severance from employment" and the only way to allow participants who are remaining on with the company to take a distribution without facing penalties would be to terminate the plan. If the plan is terminated these participants will have to be included in 401(b) testing in the plan of the other member of the controlled group...correct?

[Kevin C]

I agree there was no severance from employment because they are still employed by the plan sponsor.

Under the 401(k) regs, "Employer" includes all members of the controlled group or affiliated service group. That may affect whether you have an alternative defined contribution plan that would prevent you from distributing to these participants on plan termination. If you meet the fewer than 2% exception in 1.401(k)-1(d)(4), then distributions could be paid. But, that would require basically all of the participants to be without a plan until at least 12 months following the plan termination. Also, there are some types of plans listed at the end of (4) that are not treated as an alternative defined contribution plan.

The 410(b) testing for these plans already considers the entire controlled group. Terminating the plan may (or may not)cause the other plan's 410(b) testing to fail. You will have to run the test to see. If you have to make participants from the terminated plan eligible in the other plan to pass 410(b), it will probably prevent distributions from the terminated plan.