IRS Revenue Ruling
2000-27

 Code Sec. 401

<<FULL TEXT>>

26 CFR 1.401(k)-1: Certain cash or deferred arrangements.

Qualified cash or deferred arrangements; separation from service. The
sale of less than substantially all of the assets of a trade or business
to an unrelated employer does not preclude a distribution to affected
participants in a section 401(k) plan on account of separation from
service.


REV. RUL. 2000-27

ISSUE

Will a distribution of amounts deferred by an employee under a cash or
deferred arrangement under section 401(k) of the Internal Revenue Code be
considered to have been made earlier than the employee's "separation from
service," within the meaning of section 401(k)(2)(B)(i)(I), if the
distribution is made after the sale to an unrelated employer of assets
constituting less than substantially all of the assets of a trade or
business of the employee's employer?


FACTS

Employer X maintains Plan A, which is a profit-sharing plan intended to
satisfy the requirements of section 401(a) of the Code. Plan A includes a
cash or deferred arrangement that is intended to be a qualified cash or
deferred arrangement under section 401(k). Plan A provides that salary
reduction contributions are immediately nonforfeitable and, if the
employee has not attained age 59 1/2, cannot be distributed prior to the
employee's retirement, death, disability, or separation from service,
except in the case of hardship (as defined in the plan), plan termination
(to the extent permitted by section 401(k)(10)) or a transaction described
in section 401(k)(10)(A)(ii) or (iii).

Employer X sells certain assets to Employer Y, an entity not required
to be aggregated with Employer X under section 414(b), (c), (in) or (o)
after the sale. The assets sold to Employer Y constitute less than 85% of
the assets used by Employer X in a trade or business of Employer X. Most
of the employees of Employer X who were associated with the transferred
assets terminate their employment with Employer X and are hired by
Employer Y (the "Transferred Employees") as of the date of the sale of
assets. Transferred Employees continue to perform, without interruption
and in the same capacity, the same functions for Employer Y that they
performed for Employer X before the sale. Additionally, Employer X is no
longer the recipient of the services of the Transferred Employees.

Following the sale of assets, the administrator of Plan A allows all of
the Transferred Employees to receive a distribution of their Plan A
account balances, including amounts attributable to elective
contributions. There is no transfer of amounts from Plan A to any plan
maintained by Employer Y in connection with the Transferred Employees
(although there were direct rollovers of distributions pursuant to section
401(a)(31)).


LAW AND ANALYSIS

Section 401(k) of the Code provides that a profit-sharing plan that
includes a cash or deferred arrangement can meet the requirements of
section 401(a), provided that the cash or deferred arrangement constitutes
a qualified cash or deferred arrangement.

Section 401(k)(2)(B)(i) provides that amounts attributable to employer
contributions made pursuant to an employee's election may not be
distributable from a profit-sharing plan earlier than (I) the employee's
separation from service, death or disability; (II) an event described in
section 401(k)(10); (III) the employee's attainment of age 59 1/2; or (IV)
the employee's hardship. Events described in section 401(k)(10) include
(i) the termination of the plan; (ii) the disposition by a corporation to
another corporation of substantially all the assets used by the selling
corporation in a trade or business; and (iii) the disposition of a
corporation's interest in a subsidiary.

Sections 1.401(k)-1(d)(1)(iv), 1.401(k)-1(d)(4) and 1.401(k)-1(d)(5) of
the Income Tax Regulations interpret section 401(k)(10). Section
1.401(k)-1(d)(1)(iv) generally provides that amounts in a plan
attributable to elective contributions may be distributed on or after the
date of the sale or other disposition by a corporation of substantially
all the assets used by the corporation in a trade or business of the
corporation to an unrelated corporation. Section 1.401(k)-1(d)(4) further
provides that (i) after the sale, the purchaser must not maintain the
plan; (ii) the employee receiving the distributions must continue
employment with the purchaser of the assets; and (iii) the distribution
must be made in connection with the disposition of assets. Finally,
section 1.401(k)-1(d)(4) provides that the sale of substantially all the
assets used in a trade or business means the sale of at least 85% of the
assets, and an unrelated entity is one that is not required to be
aggregated with the seller under sections 414(b), (c), (in) or (o) after
the sale or other disposition. Section 1.401(k)-1(d)(5) provides that a
distribution may be made only if it is a lump sum distribution within the
meaning of section 402(d)(4).

For tax years beginning prior to January 1, 2000, section 402(d)
provided special forward averaging treatment for lump sum distributions
from plans qualified under section 401(a). Section 402(d)(4)(A) provided
that a lump sum distribution was a distribution or payment within one
taxable year of the recipient of the balance to the credit of an employee
which becomes payable to the recipient upon one of several events,
including a "separation from service." Special forward averaging treatment
of lump sum distributions was generally repealed by section 1401(a) and
(c)(2) (subject to limited grandfather treatment) as part of the Small
Business Job Protection Act of 1996, P.L. 104-188.

Rev. Rul. 79-336, 1979-2 C.B. 187, provides that, for purposes of the
special forward averaging treatment of lump sum distributions under the
earlier section 402(d), an employee will be considered separated from
service within the meaning of section 402(d)(4)(A) (formerly section
402(e)(4)(A)) only upon the employee's death, retirement, resignation, or
discharge, and not when the employee continues on the same job for a
different employer as a result of the liquidation, merger, or
consolidation, etc. of the former employer.

Employer X's sale of less than 85% of the assets in a trade or business
to Employer Y does not constitute a sale of substantially all the assets
used in a trade or business within the meaning of section
401(k)(10)(A)(ii). Consequently, Employer X's sale of certain assets to
Employer Y is not covered by section 401(k)(10). Thus, Plan A may
distribute the accounts of Transferred Employees if the change in their
employment status as a result of the sale to Employer Y constitutes a
"separation from service" within the meaning of section
401(k)(2)(B)(i)(I). In the circumstances considered here, the Transferred
Employees are not employed in a continuation of the same trade or
business. Under these facts, there has been a sufficient change in the
employment status of the Transferred Employees to constitute a "separation
from service" within the meaning of section 401(k)(2)(B)(i)(I).

Accordingly, the distributions from Plan A were made after the
Transferred Employees' "separation from service" within the meaning of
section 401(k)(2)(B)(i)(I).


HOLDING

The change in the status of Transferred Employees following the sale of
less than substantially all of the assets of a trade or business of
Employer X to Employer Y constitutes a "separation from service" within
the meaning of section 401(k)(2)(B)(i)(I), as of the date of the sale of
assets (when their employment with Employer X terminated). Accordingly,
Plan A will not fail to meet the requirements of section 401(k)(2)(B)
merely because Transferred Employees are permitted to receive
distributions of their account balances, including amounts attributable to
elective contributions. This holding is the same regardless of: (i)
whether Employer X or Employer Y is a corporation, or (ii) whether
Employer Y hires Transferred Employees pursuant to a contractual
obligation.

With respect to any sale of less than substantially all the assets of a
trade or business under the facts described above occurring prior to
September 1, 2000, the Internal Revenue Service will not treat the plan as
failing to follow its provisions merely because the employer does not
treat the termination of employment from the seller and the hiring by the
buyer as a "separation from service" within the meaning of section
401(k)(2)(B) and therefore does not permit distributions from the plan to
the terminated employees hired by the buyer.


DRAFTING INFORMATION

The principal authors of this revenue ruling are Steven J. Linder of
the Tax Exempt and Government Entities Division (T:EP) and R. Lisa
Mojiri-Azad of the Office of Chief Counsel (EBEO). For further information
regarding this revenue ruling, contact the Employee Plan's taxpayer
assistance telephone service between the hours of 1:30 and 3:30 p.m.
Eastern time, Monday through Thursday, by calling (202) 622-6074. Mr.
Linder can be reached at (202) 622-6214. Ms. Mojiri-Azad can be reached at
(202) 622-6030. (These telephone numbers are not toll-free numbers.)

<<END RULING>>
 

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