rr-00-27.pdf

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# Part I

Section 401. - Qualified Pension, Profit-Sharing, Stock Bonus Plans, etc.

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

Rev. Rul. 2000-27

ISSUE

Will a distribution of amounts deferred by an employee under a cash or deferred
arrangement under § 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
§ 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 § 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
§ 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 § 401(k)(10)) or a transaction described in § 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 § 414(b), (c), (m) 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
§ 401(a)(31)).

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# 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 § 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 § 401(k)(10); (III) the employee's attainment of age
59 1/2; or (IV) the employee's hardship. Events described in § 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 § 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, § 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 §§ 414(b), (c), (m) 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 § 402(d)(4).

For tax years beginning prior to January 1, 2000, § 402(d) provided special
forward averaging treatment for lump sum distributions from plans qualified under §
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 § 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 § 402(d), an
employee will be considered separated from service within the meaning of §
402(d)(4)(A) (formerly § 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

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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 § 401(k)(10)(A)(ii). Consequently, Employer X's sale of
certain assets to Employer Y is not covered by § 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 § 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 § 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 § 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 § 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 § 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 §
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.

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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.)