IRS extends "same desk" rule.

• Author: Amoroso, Vince

In Letter Ruling 9706017, the IRS denied a retirement care company's request that its former employees at a particular facility be permitted to take Sec. 401(k) distributions. This denial signals an apparent expansion of the "same desk" rule.

Sec. 401(k) provides that a participant generally may take a distribution from a Sec. 401(k) plan only on death, disability, reaching age 59 1/2, retirement or separation from service; Sec. 401(k) plans also may be terminated and the assets distributed in the event of certain sales of subsidiaries or assets. In Rev. Rul. 79-336, the Service ruled that if a participant has a new employer because of a liquidation, merger or consolidation of the former employer, but the participant will be performing the same job in the same location for the new employer, no separation from service occurs and no right to a distribution arises; in Rev. Rul. 80-129, this "same desk" rule was extended to successor employers. The rationale is that the employee is doing the same job and can hardly be viewed as having terminated his employment. The IRS's rule is based partly on fundamental pension policy, under which plan distributions should be discouraged if possible.

In Letter Ruling 9706017, Company ran a nursing care facility staffed by its own employees. In 1996, Company decided to stop running the nursing home and to lease it to a large health care system (System), which intended to continue the facility as a nursing home. Company terminated all employees who worked at the nursing home. As part of its leasing agreement, System was allowed, but not obligated, to hire the employees terminated by Company (and did, in fact, hire certain of those employees).

As part of the arrangement, System agreed to set aside a specified number of nursing home beds for long-term clients that Company was obligated to provide for. System...