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Controlled Group Status Change - Mid Year


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We have a client that for January 2006 was NOT part of controlled group. In July 2006, due to ownership changes, the entities became a controlled group. One of the entities sponsors a SEP. They need to cover all eligible employees of both entities. Question: Should we use compensation for all of 2006 to determine contributions for the "new" employees or compensation from the time the entities became a controlled group?

Where would I find the definition of compensation for this purpose? Thanks.

QPA, QKA

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I would do some research about whether or not you are a controlled group yet. The rules under Section 414 of the Code start out with the rules under Section 1563. Under Section 1563, the determination of controlled group status is based upon the status of the group as of December 31 and the year including such December 31. But, if an entity would be considered part of the group for fewer than half the days of the applicable accounting period, then they are an excluded member. See IRC Reg. 1.1563-1T(b)(2)(ii). I don't know how this rule interacts with the 414 rules - never had to look it up. I know that there are several exceptions contained in 414 for some of the 1563 rules, but I just have never bumped into an exception for this one because I have never looked.

Good luck.

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While as always I recommend consulting an attorney experienced in these matters, for CG purposes, the "component members" exclusion Becky mentions does not apply. See 1.414(b)-1(a).

So while for income tax purposes you may not have a CG, for qualified plan purposes it is a different set of parameters.

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Thanks!!! I figured that there was probably an exception there. I was hoping someone else knew where it was. Team Work is always the best way to accomplish anything.

This is a great example of why the benefit plan world is so challenging - the income tax rules get turned sideways.

So to MarZDoates, you are back to your original question. And as Belgarath notes, the traditional answers. What does the plan document say? Check with counsel.

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  • 1 month later...

The SEP likely contains a definition of compensation that would likely reference the plan year for allocation purposes. Compensation during that period should be used for all employees who are treated as employed by a single employer.

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