Who's the Employer?

Answers are provided by S. Derrin Watson

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.

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