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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Separation from Service for Pension Plan in CG Situation

(Posted March 4, 1999)

Question 12: Employer A is a member of a controlled group. Employer A adopts a money purchase pension plan. A participant of the plan terminates employment with Employer A and works for Employer B, who is a member of the controlled group but is not an adopting employer of the money purchase pension plan. Is this a distributable event? This question is very similar to question 8 but is a money purchase plan instead of a 401(k) plan.

Answer: I take it your problem concerns the prohibition on in-service distributions in a money purchase pension plan. This prohibition comes from Rev Ruls 69-693 and 60-323 and Reg 1.401-1(b)(1)(i). Those, in turn, are based on Code section 401.

The controlled group rules tell us that for all purposes under IRC 401, A and B are deemed to be a single employer. Hence, the participant has not terminated service. The participant is still in service to the same employer, just in a division under which the participant is eligible to participate. So, no, that does not entitle the plan to make a distribution.

Suppose a pension plan could make a distribution to a participant simply by putting the participant in noncovered employment with the same employer. Then, all you'd need to do to make inservice distributions would be to amend the plan to make the distributee ineligible by name. They aren't going to let it be quite that easy.

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Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.