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Who's the Employer?

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?.

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.