same desk rule in asset sale

[Gudgergirl]

Employer 1 is selling assets to (newly created) Employer 2. Employer 1 and Employer 2 are unrelated.

Certain employees will terminate employment with Employer 1 and become employees of Employer 2 performing the same tasks for Employer 2 that they performed for Employer 1.

Employer 1's plan provides for a distribution upon "termination of employment." It does not appear to have adopted the "severance from employment" standard.

Employer 2 will adopt its own 401(k) plan.

My questions are:

1. Does the same desk rule continue to apply to plans that do not adopt "severance from employment" as a distribution option?

2. If the answer to #1 is yes, does the rule set forth in Rev Rul 2000-27 (which states that the same desk rule does not apply when the former employer sells less than 85% of its assets) still apply?

[jpod]

Technically, it would only matter what the plan says, not what the Code says or once said. If your plan says distributions will be made on "termination of employment," rather than "separation from service," that sounds so close, in my view, to "severance from employment" that you would not have much of a leg to stand on in denying distributions to employees, even if they remain at the same desk under the old "same desk" rule.

With that said, if your goal is to ensure that distributions can be made without triggering any tax-qualification problems, why can't you play it safe by amending the plan before the deal closes to adopt the "severance from employment" language?

[masteff]

I agree w/ jpod, since your place already says "employment" rather than "service", you're basically where you need to be already.

EGTRRA amended the Code section covered by Rev Rule 2000-27, so it doesn't apply... but you can see in the "Holdings" of that Rev Rule that the Service makes distinction between "termination of employment" and "separation from service", which futher concurs w/ the consensus that your plan is fine.