Can a Terminated Employee Roll Over Assets To a Sister Company’s Plan?

Q: We sponsor a 401(k) plan. We have an employee who terminated and was subsequently hired by a sister company (we are both subsidiaries of the same parent, but we have separate 401(k) plans.) The employee has requested a rollover from our plan now that she has been hired by our sister company. Since the employee has terminated with our company, are we allowed to let her roll over her money?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Generally, a plan can distribute benefits when there is a “distributable event.” Separating from an employer is typically considered a distributable event, which would allow employees to roll over money from their prior employer’s plan into their new employer’s plan. However, if the employee is moving within the same controlled group, this is not the case, because, under Internal Revenue Code section 414(b), all employees who are members of the same controlled group are considered to be employed by a single employer. See also IRS Notice 2002-4; IRS General Counsel Memorandum 39824. Additionally, Treasury Regulation section 1.401(k)-1(d)(6)(ii), Example 2 states that if you remain in the same controlled group, you have not had a distributable event and therefore a rollover would not generally be allowed.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.