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Who's the Employer?

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

Transfer of Employment from Fifty Percent Subsidiary to Parent Corporation

(Posted June 14, 2000)

Question 51: Subsidiary A is 50% owned by Parent B. Both A and B have their own 401(k) plans. Subsidiary A is sold to another company; 15 employees transfer to Parent B. Will these employees be able to receive a distribution of plan assets from Subsidiary A's 401(k)? (The two businesses are not in an affiliated service group.)

Answer: Let's first note that A and B are not in a controlled group for any purpose. Eighty percent or more ownership is required for a parent-subsidiary controlled group. At ownership of more than 50%, you have a parent-subsidiary group for purposes of IRC 415, but for no other purpose. At exactly 50% ownership, you do not have a controlled group for any purpose.

Now, if they were part of a controlled group, the transfer of employment from A to B would not be a separation from service. However, because the two businesses are treated as separate businesses, the transfer of employment from A to B is a separation in service from A. (The sale of stock in A is irrelevant.) Because separation from service is a distributable event under IRC 401(k), the distribution is permitted under the Internal Revenue Code.

Important notice:

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.