My wife is being required to maintain 2 401K plans! Is this legal

My wife became a full time employee of an engineering company in December of 2015 - the month I retired. Prior to that she contracted for this company. Her contract was set up under another division of the engineering company (named "Services"). She had contributed to a non-matching 401K plan in the contract company. As an employee, she is under a different 401K plan. She now wants to move her money out of the CorrelCo plan (because of high management fees) and roll that over into her traditional IRA. The HR department is saying this is not allowed as she is still an employee of the company. How can that be when the contract company and the engineering firm are separate legal entities, with separate 401K plans? What federal regulations would cover that? Any thoughts?