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For many years, when a company engaged in a corporate transaction in connection with a sale of assets and employees were transferred to the buyer, an issue arose as to whether those individuals would be entitled to a distribution under the seller’s 401(k) plan because they left their old employer and would now be working for a new employer. The prior position of the Internal Revenue Service, unfortunately, was that such distributions could not be made if the individuals were essentially performing the same job functions as they had previously with their old employer unless certain specific statutory conditions were met. This odd result was known as the “same desk” rule, i.e., if the employee had the same desk or job responsibility with the new employer, no distributions were allowed. The IRS, however, has recently issued a revenue ruling that would permit distributions in these circumstances, even where the employee continues in the same job position. This is a remarkable relaxation of the same desk rule and should provide increased employer flexibility. However, as is typical with regulatory pronouncements, there are various issues that an employer should be mindful of when applying this new rule. Notably, if the employer is involved in a sale of substantially all of the assets in a particular trade or business, the more inflexible statutory rules (specified in Section 401(k)(10)) of the Internal Revenue Code of 1986, as amended, continue to be more applicable, rather than the more flexible rules discussed in the revenue ruling. The employer community had expressed concern over the IRS’ application of the same desk rule to plans qualified under Section 401(k) of the Code. As a result, both employers and plan participants incurred many difficulties when participants who cease to be employed by their original employers cannot receive distributions from their 401(k) plans because they have not “separated from service” within the meaning of the IRS. These participants could not rollover their 401(k) account balances, typically could not borrow from their former employers’ 401(k) plans, nor could they continue to defer amounts in their former plans. Further, if the new employers maintain their own 401(k) plans, such plans generally do not accept transfers from other plans and generally have one-year eligibility waiting periods, thus providing these participants with a gap period during which no deferrals can be made. Furthermore, employers bear the burden of determining whether a separation from service has occurred so that impermissible distributions are not made and authorized distributions are not withheld. A wrong decision would affect the qualification of their plans. Employers had been frustrated by the IRS’ application of the same desk rule to distributions from plans qualified under Section 401(k). In many cases involving corporate sale transactions, the same desk rule forces plan sponsors to continually monitor and administer the plan accounts of former employees who are precluded from receiving distributions under Section 401(k) and its accompanying regulations. As noted above, Revenue Ruling 2000-27 relaxes the same desk rule in asset deals where employees are transferred from one employer to another. While the ruling does not address all of the corporate reorganization transactions involving 401(k) plans, it does provide significant relief to both employers and employees in many situations. SAME DESK RULE Under Section 401(k)(2), distributions from 401(k) plans may only be made upon the occurrence of: (1) the separation from service, death or disability of the participant; (2) the participant’s attainment of age 59-1/2; (3) the hardship of the participant; or (4) an event listed in Section 401(k)(10). Section 401(k)(10) allows distributions (which must be made in one lump sum) only under the following circumstances: (1) the termination of the plan without the establishment or maintenance of another defined contribution plan (other than an ESOP); (2) the disposition by a corporation of substantially all of the assets used by such corporation in a trade or business of such corporation to an unrelated corporation; or (3) the disposition by a corporation of its stock interest in a subsidiary to an unrelated entity or individual. If an employee is terminated in connection with a corporate transaction that does not satisfy the requirements of Section 401(k)(10), he or she must have experienced a “separation from service” under Section 401(k)(2) to be able to receive a distribution of his or her 401(k) account balance. If the employee is transferred to the purchasing employer in the corporate transaction, the same desk rule may apply to prohibit the employee from receiving a distribution of his or her account under the former employer’s 401(k) plan. The factors that are considered in determining whether the same desk rule applies are whether the employee has: (1) the same job responsibilities; (2) job title; (3) supervisors; (4) work location; and/or (5) compensation after he or she has been transferred to the purchasing employer. The “same desk” rule has created significant consternation on the part of employers involved in corporate transactions that do not meet the requirements of Section 401(k) (10). If the same desk rule applies in these situations, employees who are transferred to the purchasing employer cannot receive distributions of their account balances under the selling employer’s 401(k) plan and thus, the selling employer experiences the administrative burden of keeping these former employees as participants in its plan. SALES OF ASSETS Revenue Ruling 2000-27 deals specifically with the situation of asset sales that do not meet the requirements of Section 401(k)(10). In the hypothetical scenario presented in the ruling, the same desk rule would apply to the employees who are transferred from the selling employer to the purchasing employer in that their jobs would be virtually identical following the transfer. However, Revenue Ruling 2000-27 holds that the transferred employees have experienced a “separation from service” under Section 401(k)(2) and therefore are permitted to receive distributions of their account balances under their former employer’s 401(k) plan. The revenue ruling is not limited to corporate entities — partnerships are covered as well. According to the ruling, it does not matter whether the selling employer or the purchasing employer is a corporation (Section 401(k)(10) requires both the selling and purchasing employers to be corporations). Because Revenue Ruling 2000-27 deals specifically with a corporate asset deal, it would seem to follow that the same desk rule would still apply to stock deals. Thus, if employees are transferred in connection with a transaction involving their employer selling its stock to a purchasing employer, the transferred employees would not be able to receive a distribution of their 401(k) account balances unless they were considered separated from service under Section 401(k)(2). OPEN ISSUES Unfortunately, Revenue Ruling 2000-27 seems to have left several significant additional issues unanswered. At first blush, the ruling’s holding would seem to render Section 401(k)(10) obsolete in the context of corporate asset transactions. Under Revenue Ruling 2000-27, any employees transferred in connection with an asset deal will be permitted to receive distributions of their 401(k) accounts. However, if the deal involves 85 percent or more of the assets of a trade or business of the employer, the plan must satisfy Section 401(k)(10) requirements. Thus, the plan administrator’s analysis must include both Section 401(k)(10) and the statutory ruling. In that case, asset deals involving less than 85 percent of assets of a trade or business would only have to satisfy the less stringent requirements of Revenue Ruling 2000-27 in order to avoid the same desk rule. This issue remains unclear at this time. INSTALLMENT PAYMENTS Another issue left open by Revenue Ruling 2000-27 is that the ruling would seem to allow an employer more flexibility in the form of distributions available; an employee’s account could, for example, be distributed in the form of installment payments. In contrast, Section 401(k)(10) requires that the distribution be a single lump sum payment made by the end of the second calendar year following the calendar year in which the corporate transaction occurred. Again, the answer may turn on whether the asset deal involves less than 85 percent of the assets of a trade or business. If it does, it would seem that distributions may be made in the form of installment payments. PROVISION OF SERVICES BETWEEN OLD AND NEW EMPLOYERS It appears that if any percentage of the transferred employees will be servicing their old employer, the same desk rule would still apply to any distributions, even to those employees who have gone to the new employer and are not providing services. Similarly, if back-office employees are indirectly servicing their old employer (e.g., the mailroom employees of an employer are outsourced to an agency but continue to service the old employer), the same desk rule would still apply. The IRS has emphasized that this analysis will be a “facts and circumstances” test that will vary from case to case. Some have used as an example an insurance company where the transferred employees continued to do work for the insurance company customers. That should qualify for separation from service treatment as long as they are not doing work for the insurance company itself. Also, one should be able to argue, although it is not entirely clear, that the employee should qualify for a separation from service if, at the time of the separation, no services were being performed, even though six months later, for bona fide business reasons, services would start to be performed. Lastly, the buyer may not lease back employees to the seller for a transitional period. It is unclear at this time whether the employees would qualify for separation from service under the revenue ruling at the end of any such transitional period in which they performed services for their old employer. OPTIONAL FORM OF BENEFITS/TRANSFERS Some practitioners have argued that you could have a violation of Section 411(d)(6) (which protects benefit options to participants) if the selling employer agrees to a trust-to-trust transfer under the asset purchase agreement (e.g., you are denying those employees a right to receive a distribution). One could argue that if the employer made an agreement prior to a separation from service, it should not be viewed as taking away a distribution right. It seems clear that it would be acceptable to transfer defined benefit plan assets to the buyer’s plan (provided no defined contribution plan assets are transferred in connection with the sale). Thus, the employer can still have a separation from service under the defined contribution plan. One additional uncertainty remains in the transfer of assets area. It is not clear whether one individual’s transfer (as opposed to a rollover) of his defined contribution plan assets to the new plan would taint the usefulness of the ruling for all employees covered by the transaction. It is hoped that further IRS guidance will clarify these and other issues. The ruling is retroactive, which means that the seller can now offer a distribution right to employees previously transferred. Some have argued that the Sept. 1, 2000, effective date of the ruling, where the employer must treat the applicable transaction as a separation from service, is contrary to the concept that the employer may negotiate a transfer of assets. TRANSFERS OF NONQUALIFIED PLAN ASSETS It would not appear to be a problem if the selling employer continues to pay the transferred employees amounts from nonqualified plans, such as SERPs. Those payments will not taint a separation from service. SALE OF STOCK AND JOINT VENTURES NOT COVERED As noted above, the revenue ruling addresses only assets from one employer to another. Sales of stock must meet the same desk rule or the statutory exemption of Section 401(k)(10). Transfers of assets to joint entities are also situations that are not covered by the ruling. As noted above, even if the revenue ruling is applicable to the employer’s situation, various unanswered questions remain, such as what if the employee is not immediately terminated upon the sale of assets, but instead terminates from his old employer three months later? Can the employer rely on the revenue ruling and make a distribution to the employee? Further, the revenue ruling makes clear that it is not available where the transferred employees continue to perform services for the old employer. The ruling is unclear as to its impact if services are not being currently performed, but the employee commences services for his or her old employer at some time in the future. Further, if some employees will perform services for the old employer but others do not, the performance of services may taint the whole transaction and force the employer to apply the same desk rule to all employees impacted by the sale of assets. Revenue Ruling 2000-27 is helpful, even if defined benefit pension amounts applicable to the employee are transferred to the buyer’s plan in a trust-to-trust transfer. Thus, this portion of the ruling provides increased flexibility to employees who, in a sales situation, may be desirous of getting a Section 401(k) distribution to rollover to an IRA while the employer mandates a trust-to-trust transfer of the defined benefit assets in a merger agreement. Despite the fact that Revenue Ruling 2000-27 covers only certain asset deals and leaves some open issues concerning the same desk rule and 401(k) plan distributions, the ruling should alleviate certain administrative frustrations of many employers. Under the ruling, employees transferred in the context of many asset deals will be permitted to receive distributions from their 401(k) plan accounts. This will ease the administrative burden of many employers as they no longer will be forced to maintain plan account balances on behalf of employees that wish to have their benefits distributed. In addition, the ruling will benefit the transferred employees who would otherwise be forced to keep their benefits in their former employer’s 401(k) plan. Employers and their human resources advisers should carefully review the requirements of Revenue Ruling 2000-27 in the context of any sale or acquisition where the buyer or seller maintains a 401(k) plan. The effective date of the revenue ruling is Sept. 1, 2000, though with an interesting twist its interpretation can be applied retroactively to prior sales. Bernard F. O’Hare is a partner with New York’s Patterson, Belknap, Webb & Tyler, where he concentrates in employee benefits and executive compensation. Telephone: (212) 336-2613. David Amendola is an associate in the employee benefits/executive compensation group at the firm. Telephone: (212) 336-2148.

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