PLR: In applying same desk rule, it is not relevant whether a transfer

[Dave Baker]

The following article is from Sal Tripodi's TRI Pension Services web site ( http://cybERISA.com ) and is reprinted here with Sal's permission (copyright 2000 TRI Pension Services, all rights reserved).

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In applying the same desk rule, it is not relevant whether a transferred employee performs different services and job functions than he performed for former employer if such change occurs after the date the employee is transferred to the new employer (added July 18, 2000).

In PLR 200027059, the IRS specifically address the affect of a later change in a transferred employee's job functions on the determination of whether there has been a separation from service with the prior employer. This case is another one where there is no sale of assets, stock, merger or other business transaction between the former employer and the new employer. However, the transferred employees, at least initially, continue to perform the same job functions that they performed for the former employer. The 342 employees at issue here were performing information services for Corporation A. A determinated that it needed to concentrate on other business operations, so it decided to outsource the information services component of its operations. The outsourcing occurred under a contract with Corporation C, an unrelated company. The contract was effective March 1, 1999. As of that date, the 342 employees were terminated from A's employees and were hired by C. Corporation C determined that the required level of staffing under its contract with A required no more than 300 of these 342 employees. C initially had all 342 employed to carry out the functions of the contract with C, but by October 1, 1999, there had been substantial changes. Only about 100 of the 342 employees will continue to perform services for A on-site. The rest work in other facilities, some performing services for A only part of the time and others no longer providing services for A. A maintains a 401(k) plan. Rulings were requested on whether any of the following employees could be treated as having a separation from service with A, thereby triggering a distribution event from the 401(k) plan: 1) those whose supervisors, benefits, or policies had changed, but who continued to perform services for A under Corporation C's contract with A, 2) employees who, on some date after their initial hire by C, work exclusively on non-A work, 3) employees who, on some date after their initial hire by C, work at least part of the time on non-A work.

The IRS ruled that none of these employees has a separation from service. When there is no business transaction (e.g., sale of assets or stock) that involves the transfer of employees, IRS looks at the job functions of the transferred employes to determine whether the same desk rule applies with respect to the former employer. If, at the time of transfer, the employees continue to perform services for the former employer in substantially the same job capacities, the same desk rule is triggered and there is no separation from service with the former employer. Any later changes to the job functions of the transferred employees are irrelevant in finding a separation from service, so long as the employees continue to work with the company who initially hired them from the former employees. Thus, all three categories of employees described in the prior paragraph do not have a separation from service with A, even if they no longer perform any services under C's contract with A or work only part of the time under such contract. So long as these employees continue to work for C, the A 401(k) plan may not treat them as having a separation from service.

[Guest JWBrown]

In the past month, I've seen a few PLRs addressing this subject (the PLRs were recently released but actually were completed some time ago).

The trend seems to be that in the absence of a corporate transaction, the IRS is saying that there is a separation from service when the employees who moved from one employer to another do not provide services back to the employer who sponsored the plan that covered them.

So in a classic situation Company A receives contractual services from Contractor B's employees. The employees participate in Contractor B's 401(k) plan. Contractor B loses the contract, and it is won by Contractor C. Contractors B and C are unrelated from a 414 perspective. The employees are terminated by Contractor B and thereafter employed by Contractor C. These employees are basically doing the same jobs as before. The IRS is allowing distributions to the employees under the separation from service rule.