“The people at these companies (hotel chains) who run their 401(k) plans have wanted this to happen for a long time,” said Thomas Kolb, attorney for an unnamed national hotel chain that requested the ruling. Kolb told PLANSPONSOR.com the ruling is expected to apply widely in the hotel industry, and potentially to thousands in other industries.
The case involved employees affected by the sale of their place of employ to a real estate investment trust. The Trust opted to maintain the existing employment arrangements, though it was under no obligation to do so. While new accounting, payroll and training systems were put in place, the nature and location of the terminated employees did not change as a result of their rehiring.
The IRS found that in this particular situation, the hotel employees were rehired to perform “substantially the same job at the same location,” with “no liquidation, merger, consolidation, transfer of corporate assets or similar corporate event associated with the discharge of these employees.”
With no overlap in ownership – and no agreement between employers to rehire the terminated employees, the IRS concluded that the distributions were made on account of the employees’ separation from service.
Kolb had originally applied for the ruling in January 1997, but at the time the IRS ruled against the request, citing the “same desk” rule. However, the IRS failed to make the ruling public, as it is required to do 90 days after releasing the findings privately. Discovering that fact, and realizing the recent shift in sentiment at the Service, Kolb decided to resubmit the request, with favorable results.
Responding to Kolb’s request for reconsideration, the IRS decided the 1997 letter ruling is not consistent with its current views and revoked the prior ruling letter.
Private Letter Rulings apply only to the taxpayer/plan requesting the review – and for the circumstances as described in the request.
The same desk rule was originally designed to prevent employers from arbitrarily manipulating a business operation to create an opportunity for a lump-sum distribution that would be eligible for preferential tax treatment. Others have noted that it may have been intended to discourage early withdrawals.
The IRS has maintained that, for purposes of 401(k) plan distributions, a “separation from service” occurs only where a participant dies, retires, resigns or is fired. An employee that continues to work “at the same desk”, even if for a new employer, is not eligible for special tax treatment – or the distribution of 401(k) contributions.
A repeal of the same desk rule was included in the Taxpayer Refund and Relief Act of 1999, vetoed by President Clinton for other reasons. A repeal is also included in the current version of HR 1102, the Comprehensive Retirement Security and Pension Reform Act.
– Nevin Adams firstname.lastname@example.org