Distributable Event Due to Ownership Change?

[Susan S.]

I am working with a 401(k) plan that has several participating employers (controlled group). One of the entities is being "sold." I talked to the attorney and he said it is basically a stock transaction. I don't know what that entails but he did say that for the most part, the employees are keeping the same jobs, at the same place, working for the same person. They are not terminating the plan, and the other participating employers will remain. The attorney wants to make sure the document specifies severance of employment rather than separation from service, or in other words make sure there is a distributable event for the participants of the entity being sold. Why they want this, instead of having the new entity adopt the plan, I don't know. It is a Sungard Corbel document and was restated in 2010. I only see termination of employment referenced and don't see any mention of severance of employment or separation from service. The prior document did specify severance of employment in the EGTRRA amendment, but I assume that is not relevant being from an old document. Can I amend the language to ensure a distributable event? Even if I can, it seems like there is still a controlled group issue somehow and these employees should not be entitled to a distribution.

[masteff]

This thread may help: http://benefitslink.com/boards/index.php?/topic/51399-severance-from-employment/

Here's notice 2002-4, severance from employment is under section III. http://benefitslink.com/src/irs/notice2002-4.html You could put it on the attorney to write a short memorandum for your files documenting how the transaction complies with "relevant IRS guidance including but not limited to Notice 2002-4".

A key question is will the employees of the company continue to be covered by the 401(k) plan after the transaction.

As to the plan's language, the biggest thing is that it no longer says "separation". If in doubt, call Sungard Corbel and ask about "severance" vs "termination".

As to your control group question: is the new employer related in relevant way to the other participating owners? If not, then the company falls out of the control group after the transaction.

[Susan S.]

Masteff, your reply was extremely helpful. I will check with Sungard Corbel on the language and discuss Notice 2002-4 with the attorney. Thank you very much!