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Answers are provided by S. Derrin Watson, JD, APM
Separation from Service in Controlled Group
(Posted February 26, 1999)
Question 8: A parent and a wholly-owned subsidiary have separate 401(k) plans. If an employee transfers from the parent to the sub (assume a new job, with no similar tasks) will the employee be considered terminated from the parent plan? Assume the plans do not address any kind of transfer provisions.
Answer: I assume your question relates to whether this is a distributable event as a separation from service under IRC 401(k)(2)(B)(i)(I). No, it is not.
The parent and the subsidiary are a controlled group under IRC 414(b). As such, they are treated as a single employer for all purposes under IRC 401. So, the transfer you describe is no different from moving from the accounting department to the shipping department of the same company. As far as IRC 401 is concerned, there has been no separation from service because the individual is working for the same company as before.
A discussion of the consequences of being in a controlled group is found in Chapter 10 of my book, Who's the Employer?.
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