Same Desk Rule/RevRul 2000-27

[Christine Roberts]

In Rev. Rul. 2000-27 the IRS has essentially exempted, from the same desk rule under 401(k)(10), transactions involving the transfer of less than 85 percent of the assets of a trade or business - it has said that it will respect applications of the same desk rule to transfers of less than 85% of assets occurring prior to Sept. 1, 2000, it also stated that it will allow application of Rev. Rul. 2000-27 to past transactions that fall within its paramaters. Question - if the asset selling organization asserts the same desk rule in a transaction that is now eligible for non-same desk rule treatment under 2000-27, contary to the wishes of former employees, is it a violation of the former employees' ERISA Sec. 510 rights to continue to prohibit distribution or even rollover of their plan accounts to a new employers' plan??

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[Guest hank]

Christine -

I've read and reread the new IRS position and its comments at conferences and so forth, and I don't see that the new position as set forth in Rev. Rul. 2000-27 creates an ERISA 510 right to distribution/rollover where none previously existed. I think a plan sponsor could adopt the September 1, 2000 date as the prospective change in the "law" without having to change its position with respect to transactions that closed before September 1, 2000.

That said, I also think that if a plan sponsor wants to go back in time to "undo" its application of IRS' old same desk position, it needs to do so for all old transactions which would be covered by the new rule if they occurred after September 1, 2000.

[Kirk Maldonado]

Christine:

I think it is an IRC Section 411(d)(6) issue; not an ERISA Section 510 issue. That leads you to a different analysis.

[Guest R Snyder]

Kirk: If the seller's plan permits distributions upon separation from

service or upon a 401(k)(10) event, and an asset purchase transaction results in a separation from service or a 401(k)(10) event, can the seller and purchaser agree (without participant consent) to transfer the “transferred” (i.e., purchaser-hired) employees account balances from Seller Plan to Purchaser Plan -- with no distributions until employees separate from service from purchaser -- without violating 411(d)(6)?

[Kirk Maldonado]

R Snyder:

That is a very good question. I think the answer will depend on the terms of the plan. If the plan says that such an event automatically entitles the participant to a distribution, you may have a problem. However, most plans don't read that way; they simply say that a participant cannot receive a distribution until one of the enumerated events occur. In those cases, I don't think that the failure to make a distribution would be a Section 411(d)(6) violation, but I'm not sure.

On one hand, it could be argued that is the impermissible use of employer's discretion to preclude distributions. On the other hand, the employer (sponsoring the plan) could argue that the buyer of the business didn't want to allow any distributions, so that the choice wasn't that of the employer sponsoring the plan.

I'd be interested in hearing the views of other people on this topic.

[pjkoehler]

If the plan terms are ambiguous as to whether vested participants who separate from service have an unfettered right to an immediate distribution, then, an interpretation that deviates from an established pattern or practice solely to accommodate the business purposes of the plan sponsor is going to be difficult to square with at least 2 ERISA fiduciary standards ("exclusive purpose" and "documents rule"). While the plan may not have established a pattern or practice regarding 401(k)(10) events, in all likelihood, a plan that has been around for a while has regularly allowed involuntarily terminated vested participant to elect immediate distributions to reduce administrative expenses. In fact, most plans avail themselves of the automatic cashout rules when they can. If this is the appropriate interpretation of the plan, the employer faces a delimma. One the one hand, it can process the distribution, breach the applicable covenant in the acquisition agreement and try to reach an accord and satisfaction with the acquiring company. On the other hand, it can coerce the plan administrator to depart from the terms of the plan and thereby (1) expose the plan administrator and itself to fiduciary liabilty, (2) violate 411(d)(6) my violating the anti-cut back rule regarding distribution events, (3) create an operational qualification violation (failure to administer the plan in accordance with its terms is a 401(a) violation under the regs), and (4) probably breach the acquisition agreement anyway by undertaking actions that jeopardize the plan's qualified status (assuming there is such a negative covenant).

[This message has been edited by PJK (edited 06-27-2000).]

[Guest R Snyder]

Further thoughts on my own question… Assume it is determined that the participants do have an unfettered right to elect distributions under the Seller's Plan in the event of separation from service or a 401(k)(10) event, but the transfers are made in accordance with the purchase agreement in any event. As noted by PJK, this could

mean that the Seller's Plan has violated ERISA and jeopardized its qualified status. Moving to the Purchaser's Plan - it has now taken the accounts from a Plan that it knows may have violated Code and ERISA requirements, which is, of course, a problem. Also it has taken the accounts subject to 411(d)(6). Does this mean that if the "transferred" participants could have received distributions under the Seller's Plan, these "distribution event(s)" carry over via 411(d)(6) to the Purchaser's Plan, and therefore the "transferred" participants could elect distributions of their transferred accounts from the Purchaser's

Plan at any time? Would the Purchaser's Plan be required to permit these distributions if it wishes to "cleanse" the transferred accounts of any qualification taint concerns and/or in order to safeguard its own qualified status by assuring compliance with 411(d)(6)?

[pjkoehler]

RSnyder, the regs provide that

(1) The right to receive a periodic or nonperiodic distribution on termination of employment is a Sec. 411(d)(6) protected benefit. Reg. Sec. 1.411(d)-4, Q&A-1.

(2) Section 411(d)(6) protected benefits cannot be eliminated by reason of an involuntary transfer to another qualified plan. Reg. Sec. 1.411(d)-4, Q&A-3(a).

(3) A plan may not be amended to add employer discretion or conditions restricting the availability of Section 411(d)(6) protected benefits. Reg. Sec. 1.411(d)-4, Q&A-7.

Based on this revised hypo, at a minimum, to safeguard the qualified status of the Purchaser's Plan, it should be amended (and the SPD modified) so that the transferred accounts are treated as immediately distributable (i.e. without regard to their employment by Purchaser) to the same extent that they would have been under the Seller's Plan if the transfer had not occurred.

[Guest Marie Devlin]

I was an employee of a hospital here in Pgh. Pa.in the anesthesia department.I am a nurse anesthetist. Our department was forced by the hospital into employment under a group of doctors. Where previously we were employed by the hospital we are now employed by the doctors. In the course of this transition, we had a lawyer and tried to secure several benefits to offset our loss of pension earning power for the year 2001 and EVEN with his help we got NOTHING! Under our new employment we cannot participate in the profit sharing program until Jan. 2002. We were denied 1)severance 2)the ability to accelerate earnings into our 403B to meet the maximum for taxes 3) the ability to rollover our defined benefit plan into a personal account. The hospital claims the same desk rule since we are working in the same building doing the same job. I disagree with this for several reasons. First of all, there is no common shareholding between the two entities. Also there is no shared ownership. There was no merger and nobody bought anybody out(88% or otherwise). Secondly, there HAS been a change in supervisory personnel as well as changes in the staff of the department. I had read in a document that same desk rule does not apply when there is a change in supervisory personell. The previous Chairman,an anesthesiologist who was not employed by the hospital but was also contracted, was replaced by someone from the New Anesthesiology group and the Chief Nurse Anesthetist who WAS hospital employed was replaced with an employee of the new group. Two people left voluntarily and one person was not offered her original position under the new group. I have spoken to the Pension Welfare Benefits Administration who directed me to the IRS. The woman I spoke to on the phone at the IRS stated that defined benefit plans are not governed by same desk rule. She did mention Rev ruling 2000-27.This employment change took place as of November first, so that is after the revision took effect in September, right? She said that this revision provides for defined benefit to be exempt from same desk rule. I do have my description summary of the plan. I know that I can view the documents at the bank downtown where the trust is held.

My questions are:

1) In going about this research what would my next step be? Should I go to the bank and view the documents or should I ask them to send me a copy? I know there is a fee for receiving these documents but I have no idea what that would cost or what is the customary procedure.

2) From what I have described does anyone feel that I have had a real separation of service and if this does fall under same desk ruling?

3) If I view the plan myself, will I be able to clearly see in the document what I need to know or do I need legal assistance?

4) Even if the same desk rule does not apply under ERISA is there a waiting period under these circumstances?

The woman at the IRS seemed to think that their not releasing my defined benefit plan was a violation and recommended that I follow the procedure of 1) examining the documents; 2) writing a letter to ask for release of a distribution and the language of the document that states I am NOT entitiled to a distribution (if that is the case)....then... 3)write to administration of the hospital requesting my distribution and threaten them with an audit by the Department of labor and the IRS if this is not accomplished.

Any comment to this would be appreciated.