Implied Ties Of Control Group

[Guest Commuter Rex]

This just came in from company ready to start a 401k, I was wondering if you had an answer or know of a reference source. A small (engineering) company (s-corp) owned by several people (of which 2 are brothers), owners intend to create various LLP’s and corporations. Each company will be created to take a separate process/technology to market, with intent to limit liability exposure of original company from anything that might happen with the new processes/technology/companies in the future.

Ownership of the companies intends to be set up so that several will be considered under control group for purposes of the 401k plan benefits. (Each company will get its own 401k plan, identical benefits.)

The question is are there any laws or codes that could create a binding tie between the companies simply because they share 401(k) plan provisions under a control group? Have anyone seen this happen?

Thanks.

frankh@wellington401k.com

[Mike Preston]

I called an attorney I work with who is somewhat familiar with transactional analysis. His opinition is that the existence, or lack thereof, of 401(k) plans with identical provisions is not going to matter one whit as far as liability goes. Imagine the situation where the companies do not set up any 401(k) plans. To the extent they are successful in establishing liability walls between the entities is something that stands on its own. Now, assuming those walls are standing, the adoption of identical 401(k) plans (and combined testing under 410(b), if necessary, to the extent the entities are required to be aggregated) won't do anything to break down those walls. That is, to the extent the entities are controlled, they are controlled whether or not they have the plans. To the extent they are controlled, should that fact work against the walls, those walls are being attacked whether the plans exist or not.

Of course, this is a question for the folks who are advising the client on establishing those walls in the first place. If they can't answer the question, they need to find a lawyer who can.

[mbozek]

The controlled group rules apply only to the qualification of plans under IRC 401(a) and the liabilitily provisons for DB plan benefits under the PBGC provisions. There is no liability under Title I of ERISA to other members of the controlled group for a plan sponsored by one member, eg. breach of fiduciary liability. The liability of one corp for another corp's debts, judgments, etc will be governed by state law but if the entities are incorporated properly there will not be any joint and several liability by other members of the controlled group because "piercing the corporate veil" (lawyer term) is generally not permitted by the courts. The incorpration itssdelf it the fire wall to prevent liability extending to another corporate entity.

[GBurns]

I would love to get a few opinions on this. My personal and research experience shows me that "piercing the corporate veil" is permitted and accomplished very often through the courts. However, mbozek seems to have experienced otherwise, and so I wondered what the consensus (based on factual situations) would be.

[Guest Commuter Rex]

Thank you. My understanding now is:

All the plans would operate independently as far as liability and individually correcting their recordkeeping issues & (combined) testing results. One plan's issues wouldn't drag the other companies/plan sponsors into the fray. Even common plan trustees wouldn't matter. What matters is proper establishment of liability walls between the different companies.

An attempt to pierce the corporate veil would need something much stronger to stand on than the fact that the retirement plans are classified as being under a control group.

This is a reasonable assessment?