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CCH® PENSION — 08/18/09

Stocks transferred from two companies to new DC plan as part of corporate reorganization were "securities of the employer corporation."

After a corporate reorganization, shares of stock transferred from two corporate entities to a new defined contribution plan consisting of a cash or deferred arrangement feature and an employee stock ownership plan feature would be treated as "securities of the employer corporation" within the meaning of Code Sec. 402(e)(4), and the net unrealized appreciation of those shares could be excluded from gross income on distribution by the plan to a participant or beneficiary, according to IRS Letter Ruling 200927040.

Company C was the corporate parent of Company A prior to Company C's merger with a subsidiary, and was a wholly-owned subsidiary of Company A after the merger. Company B was a wholly-owned subsidiary of Company A at all times before the spin-off of Company B. Thus, the IRS explained, at the time of the spin-off, shares of Company A common stock and Company B common stock were "securities of the employer corporation" within the meaning of Code Sec. 402(e)(4)(E)(ii). Code Sec. 402(e)(4)(E)(ii) provides that the term "securities of the employer corporation" includes securities of the parent or subsidiary corporation of the employer corporation.

Prior to the completion of the reorganization, employees of Company A, Company B, and Company C, and their subsidiaries participated in a defined contribution plan sponsored by Company C, which included a cash or deferred arrangement feature and an employee stock ownership plan feature. This plan held shares of Company C common stock before the reorganization. As a result of the Company C merger, the plan received shares of Company A common stock (converted from shares of Company C common stock). With the spin-off of Company B, the plan, as holder of Company A common stock, acquired shares of Company B common stock.

The IRS determined that, although Company A and Company B were no longer members of the same controlled group of corporations after the spin-off, their common stock shares were "securities of the employer corporation" at the time of the spin-off. The transfer of these shares to the new defined contribution plan adopted by Company A pursuant to the spin-off did not change their status as "securities of the employer corporation." As such, the net unrealized appreciation in these shares may be excluded from gross income upon distribution by the new plan to a participant or beneficiary, to the extent provided in Code Sec. 402(e)(4).

The IRS also addressed the determination of the basis of company shares held by the prior defined contribution plan immediately before and after the reorganization and the basis of company shares held by the new defined contribution plan. The IRS concluded that this determination would not be changed by the transfer of Company A and Company B shares from the prior plan to the new plan resulting from the reorganization.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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