Same desk rule?

[k man]

A Plan sponsor (company) sells 88% of its stock to 6 or 7 entities. They will continue to use the remaining stock to make aquisitions. The hiring and firing of all the employees will remain under the control of the original plan sponsor entity. however, all payroll and benefits will be handled by a leasing company going forward.

should these people get paid out or is it a same desk rule scenerio?

[rcline46]

It would appear that the original company is still in business and operating with the same employees. All it did was add investors. From what you presented, you never even get to the same desk rule.

The leasing issue is another problem as the employees could become eligible for the leasing company's plan as well as the original plan.

[k man]

i guess the way you get there is that the employees are no longer technically employed by the employer. thus, with their change in status comes the question of whether they have had a separation from service. i agree with your latter point concerning the leasing company and i am inclined to think that the employees cannot be paid out based on same desk rule. would be interested in anyone elses thoughts.

[Erik Read]

If the employer/sponsor is supervising these employees and retaining hire/fire authority, the DOL says that they are employees regardless of who pays them. I think that you need to start with that, and work forward from there. If the leasing company maintains the supervisors at the sponsor, then you might be okay. Settle the employer question, then we can move on to same desk.

Let us know a little more about the situation.

Thanks. Great string for current environment with so many M&A's going on these days.

[k man]

i am not sure but i believe the employees are in fact supervised by the company. the leasing company handles the typical leasing company functions. Are you saying that if they are leased employees, supervised by the employer, they are employees of the plan sponsor?

[k man]

i am not sure but i believe the employees are in fact supervised by the company. the leasing company handles the typical leasing company functions while the company retains the right to hire and fire.

are you saying that under this scenerio, the employees are still employees of the company and thus you agree there has been no separation from service.

[rcline46]

Based on the information provided I stand by my original comment. These are still employees of the company since they company retains control of the employment.

Derrin Watson has an excellent book, latest edition coming out soon, called Who's the Employer. Has many examples of this kind of situation. It is invaluable.

[pjkoehler]

Neither the transaction you've described nor the leasing arrangement is a Code Sec. 401(k)(10) event. Accordingly, the plan may distribute the accounts of the affected employees only if the change in their employment status as a result of the transaction or the leasing arrangement constitutes a "separation from service" within the meaning of Code Section 401(k)(2)(B)(i)(I), at least as to the elective deferrals. See Rev. Rul. 2000-27. There, in the context of an asset deal, the IRS followed the logic of Rev. Rul. 79-336, which interpreted the meaning of the term "on account of a separation of service" regarding the definition of a lump sum distribution set forth in Code Sec. 402(d)(4)(A) (formerly Sec. 402(e)(4)(A)). In that earlier ruling the IRS specifically excluded from the definition of "separation from service" any situation in which the employee continues on the same job for a different employer as a result of a liquidation, merger or consolidation, etc. of the former employer. Following that guidance, the IRS concluded in Rev. Rul. 2000-27 that the employees transferred to the buyer's operation were not employed in a continuation of the same trade or business and, therefore, had separated from service for purposes of this rule. The transaction you've described appears to be a mere recapitalization of the plan sponsor as a result of which the employees continue in the same job for the same employer. As far as the nonelective contributions, the IRS generally applies similar analysis with respect to the definition of "separation from service." See FSA 1998-398. So, I don't see how the transaction would remotely provide a basis for a distribution on the grounds that the employees had a "separation from service."

Regarding the employee leasing arrangement, it sounds like virtually all of these employees would be treated as "leased employees" under Code Sec. 414(n) unless the leasing company has a safe harbor money purchase plan. I'm guessing that these "leased employees" are "otherwise nonexcludible" for Sec. 410(B) purposes and that they make up the bulk of the workforce. Therefore, the plan sponsor's 401(k) plan probably cannot satisfy 410(B) if it excludes them as a class. If the plan must cover them, or at least most of them, you probably cannot argue that the "leasing arrangement" caused a "discharge" or a "separation from service."

Even if the leasing company has a safe harbor plan, or the plan sponsor's plan can somehow exclude all "leased employees" as a class under Sec. 410(B), it'll be a stretch on a facts and circumstances basis arguing that individuals who perform full-time services for the plan sponsor and who are under the plan sponsor's direction and control have been discharged merely because a third party paymaster is contractually obligated to pay their wages and benefits.[Edited by PJK on 09-06-2000 at 02:00 PM]