Distribution event?

[Oh so SIMPLE]

Do employees have a distribution event with regards to benefits in 'old plan' where:

1-they were employed by old company which sponsored old plan,

2-old company no longer does business and they are not actively working for old company,

3-old company continues to exist as a business entity simply to wrap up its dealings, including continuing to sponsor old plan which is not yet in the process of being terminating,

4-new company was formed and immediately began operating the same business as old company when old company stopped operating that business, and

5-the employees are working for new company which is owned by more than 70% of the owners of old company (and do not have in-service distribution events--e.g., are not yet normal retirement age).

New company has set up new plan, which accepts rollovers into new plan.

Must there be a termination of old plan for there to be a separation from service for a distributable event, or merger of old plan into new plan, for the rollovers of these benefits?

[masteff]

EGTRRA Section 646 eliminated the "same desk" rule; "separation from service" was changed to "severance from employment" unless your plan did not make the appropriate EGTRRA amendment.

However, the control group rules still apply. See Section III here: http://www.irs.gov/pub/irs-drop/n-02-4.pdf (I don't deal enough w/ the control group rules to offer an opinion on whether they apply to you or not.)

[00hskrgrl]

BE CAREFUL - the "same desk rule" wasn't eliminated. The change allows plans to include "severance from employment" as a distributable event in their plan document. You'll need to check the plan document to see if "severance from employment" is a distributable event in the old plan; if not, the same desk rule is in full force unless the plan is amended. I work with a large plan that did not amend for severance from employment, and it's a mess when subsidiaries are sold-off and the buyer doesn't want to spin-off that portion of the assets.

I agree with masteff that you likely have a controlled group issue affecting the ability for participants to take distributions. It appears that the two companies are part of the same controlled group and that employees have essentially transferred employment within the controlled group. Generally, this is not a distributable event. Additionally, if the two plans in question are 401(k) plans, there might be some issues with terminating the old 401(k) and starting a new 401(k) within 12 months.

The best approach might be to merge the old plan into the new plan or alternatively, freeze the old plan and pay folks out as they terminate employment from the controlled group.