Age 55 Exception

[BTH]

I want to get some opinions about what seems like a complicated situation regarding the Age 55 exception on the 10% early distribution penalty. Here are the details:

Employer A and Employer B are both related, participating employers in a Profit Sharing Plan.

Employee X works for Employer A and has received contributions over the years to the Profit Sharing Plan from A.

On 9/1/2009, X terminates employment with A, but is employed by B.

Because of a business transaction, Employer B is no longer related to A and ceases being a participating employer in the Profit Sharing Plan effective the same date -- 9/1/2009.

X turns age 55 in June of 2010.

X terminates employment from B in September of 2010 and receives a lump sum distribution from the Profit Sharing Plan in October of 2010.

Based on your knowledge of the age 55 exception, do you think this employee would be eligible for the exception and have Code 2 on the 1099-R?

Thanks.

[ETA Consulting LLC]

No, the penalty would continue to apply. This is a classic separated from service versus severance from employment issue. The Participant's Account remained inside Plan A when the participant terminated employment in 2009 and moved to Company B.

The case would be different had B took over that portion of the plan at the time of the takeover in 2009.

It's hard to follow your fact pattern (but you were very detailed).

Your first step is to make a definitive assessment of 'who is the employer' sponsoring the plan for which the Participant is a part of. The second step is to determine when did the participant sever employment from that employer. In your fact pattern, A is still the sponsor, and the Participant terminated employement with A back in 2009 to work with B.

Good Luck!

[Lou S.]

No, the penalty would continue to apply. This is a classic separated from service versus severance from employment issue. The Participant's Account remained inside Plan A when the participant terminated employment in 2009 and moved to Company B.

But he says A and B are related. Doesn't that help in this case? I'm not sure how related they are but if CG or ASG wouldn't his time in Company B be continuation of time in Company A?

I admit some of the employer-employee relation questions vex me at times so I could be way off on this and have never actually run into this particular situation before.

[ETA Consulting LLC]

You make a good observation. I read it to say that they were not related at any during 2010 and used that as the basis for the answer. You can see how important the minor details become. Had the companies been related during 2010, then the answer would be different.

[BTH]

Yes, both Employer A & Employer B were related and participating employers in the same Profit Sharing Plan until a business transaction ended all connections in 2009.

It seems that to qualify for the age 55 exception, Employee X needs to separate from service: (1) in or after the year in which employee turns 55 and (2) from the employer maintaining the plan. In this case, Employee X turned 55 in 2010, but terminated employment from Employer A in 2009, when age 54. So, the employee would not be eligible for the exception. However, the status of Employer B is the wild card here. Is is possible that Employer B would be considered as "maintaining the plan" since B was a participating employer in the past? Or does the ending of all connections between Employer B and the Plan in 2009 effectively end that status? If Employer B is considered maintaining the plan, then when X terminated in 2010, it was in the year when age 55 was reached and would qualify for the exception. Another note is that although the employee was hired by Employer B in 2009, the employee never received any contributions to the Profit Sharing Plan from employer B or any income from Employer B when it was related to Employer A.

Ok, this is confusing enough for now!

[ETA Consulting LLC]

Is is possible that Employer B would be considered as "maintaining the plan" since B was a participating employer in the past? Or does the ending of all connections between Employer B and the Plan in 2009 effectively end that status? If Employer B is considered maintaining the plan, then when X terminated in 2010, it was in the year when age 55 was reached and would qualify for the exception. Another note is that although the employee was hired by Employer B in 2009, the employee never received any contributions to the Profit Sharing Plan from employer B or any income from Employer B when it was related to Employer A.

This is the question that needs to be answered. It is pretty easy to find. If B took over sponsorship of that portion of the plan, he would likely have a summary plan description (SPD) titled with Employer B as the sponsor. Also, back in 2009, if he was issued a special tax notice and package from the plan advising him he is eligible for a distribution since he is terminated employment, this would signify the plan is still with Employer A. So, determining the employer should be relatively easy, but you are on the right track.

Good luck!

[Guest hary]

Is is possible that Employer B would be considered as "maintaining the plan" since B was a participating employer in the past? Or does the ending of all connections between Employer B and the Plan in 2009 effectively end that status? If Employer B is considered maintaining the plan, then when X terminated in 2010, it was in the year when age 55 was reached and would qualify for the exception. Another note is that although the employee was hired by Employer B in 2009, the employee never received any contributions to the Profit Sharing Plan from employer B or any income from Employer B when it was related to Employer A.

This is the question that needs to be answered. It is pretty easy to find. If B took over sponsorship of that portion of the plan, he would likely have a summary plan description (SPD) titled with Employer B as the sponsor. Also, back in 2009, if he was issued a special tax notice and package from the plan advising him he is eligible for a distribution since he is terminated employment, this would signify the plan is still with Employer A. So, determining the employer should be relatively easy, but you are on the right track.

Good luck!