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Coverage and Discrimination Testing for Leasing Organizations


Alonzo
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There are a lot of assumptions in your example. The big one is that there is a valid employer/employee relationship between the leasing organization and its employees. Another one is that 100% of the employees of A, B and C are now the "employees" of the leasing organization.

Given your presumptions, what you say is correct. The former employees of A, B and C are treated as employees of the leasing company, for the purpose of determining whether the plan of the leasing company passes coverage and nondiscrimination. This would be true even if, for some reason, the benefits of some of those employees were taken into account in determining whether a plan of A, B or C met the nondiscrimination requirements.

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It seems to me that structuring and testing retirement plans for employers that contract with leasing organizations is similar to testing for employers in the same controlled group - as long as the owners are also considered as leased employees. Is this correct?

The following illustrates my rationale. I'd appreciate your comments.

A leasing organization contracts with 3 employers, A, B and C. All of the "employees" of A, B and C, INCLUDING THE RESPECTIVE OWNERS, become "employees" of the leasing organization.

The leasing organization sets up a safe-harbor profit sharing plan for "employees" of A (including its owner who is now an employee of the leasing organization).

(I put "employees" in quotes, since these individuals were former employees of A and are now employees of the leasing organization.)

The leasing organization sets up a safe harbor defined benefit plan for "employees" of B (including its owner who is now an employee of the leasing organization).

No retirement plan covers "employees" of C.

1. Since "A" is a safe harbor plan, we perform 410(B) coverage testing for "employees" of A by doing a ratio percentage test with employees of A in the numerator and all employees of A, B and C in the denominator.

2. Similarly, since "B" is a safe harbor plan, we perform 410(B) coverage testing for "employees" of B by doing a ratio percentage test with employees of B in the numerator and all employees of A, B and C in the denominator.

3. Let's assume the above two steps fail. We then do a 401(a) general test based on the entire group (A, B and C) converting contributions to benefits, or vice versa.

4. Finally, in determining whether or not the entire group (A, B, and C) is Top Heavy, we can exclude C because they are not participants.

5. Is there any difference in the above reasoning if A and B were both separate defined contribution plans?

6. Is there any difference in the above reasoning if A and B were one single defined contribution plan with different contribution structures for A and B (e.g., employees of A receive 3% of pay and employees of B receive 5% of pay).

7. Is there any difference in the above if instead of instead of A, B and C contracting with a leasing organization which maintains the plan, A, B and C were companies within a controlled group (e.g., owned by a holding company).

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