Severance from Employment

[Kevin C]

Companies A & B sponsor a 401(k) plan. A & B are part of a controlled group. Unrelated Company C purchases B in a stock purchase. All employees of B will go on C's payroll immediately after the sale. C has its own 401(k). Have the employees of B had a severance from employment that would let them receive a distribution from the A & B 401(k) Plan?

[ETA Consulting LLC]

Yes, if C doesn't take over the "B" part of the plan. The IRS rules extended to the "sale of a subsidiary" when determining a severance from employment; so that it would be treated simular to an asset sale.

Good Luck!

[00hskrgrl]

Unrelated Company C purchases B in a stock purchase.

This is the key - stock purchase, not an asset purchase. In a stock purchase, the OWNERSHIP changes, but the employer does not. Based on the facts you list, Company B and C are now a controlled group, and the employees have transferred employment from one company to another within the same controlled group. This does not generate a distributable event for the employees. See GCM 39824 for more details.

An exception may be made if Company B is a subsidiary of Company A and (1) Company B no longer maintains its plan after the sale of the subsidiary (presumably Company retains responsibility for maintenance of the plan); (2) no assets/liabilities transfer from Company B's plan to Company C's plan; and (3) Company B is not treated as the same employer under IRS 414(b), © or (m). See Notice 2002-4 for more details.

Had this been an asset purchase, then whether severance from employment had occurred would depend greatly on the terms of the purchase agreement and whether Company C assumed responsibility for Company B's plan.