Acquisition, Affiliated Employer Exclusion and 410(b), 401(a)(4)

[cheersmate]

FACTS:

ABC is an S-Corp owned 100% by Mr. A

ABC sponsors a Safe Harbor 401k (Cross Tested) Profit Sharing Plan:

• 2 HCEs are elig
• 10 NHCEs are elig

ABC 401kPSP excludes employees of Affiliated Employers who have not adopted the Plan; Eligibility is 1 Year of Service with 1000 hours (no min age); Years of Service with Affiliated Employers are counted for plan purposes

Maryland LLC is a multimember LLC taxed as a partnership

• 5% membership interest: Mr A
• 95% membership interest: Partnership Z (2 partners, both of whom are unrelated to Mr. A)
• At 1/1/2016 the membership interest changed when Partnership Z wanted to close down. In response to this,

1. Mr A acquired 90% of the partnership's interest via an assignment of interest
2. Mrs A (Mr A's wife) acquired 5% of the partnership's interest via an assignment of interest

As a result of this change in LLC membership , Maryland LLC and ABC Corp are now under common control as of 1/1/2016

Mr. A hired an outside person (unrelated) to manage the day to day LLC operations as he simply does not have the time to do it.

There are 5 LLC employees (all NHCEs), 3 of whom are very very part time (never 1000 hours), the other 2, John and Jane, may or may not work 1000 hours in a year for LLC however they are also employed by ABC Corp and have had at least 1000 hours credited per year with ABC Corp. These 2 employees are 2 of the 10 NHCE Participants in the ABC Plan. They both receive 2 separate W2s -- 1 for ABC Corp, 1 for LLC

QUESTIONS:

1. How do the 2 "shared" employees, John and Jane, count in the 410b test? Assuming the 3 very part time employees of LLC never have 1000 hours, they will never meet eligibility for 410b testing, BUT, the 2 shared employees, John and Jane, have >12mos, 1000 hours and are eligible for the ABC Corp plan (i.e. they are active participants), yet excluded as far as their LLC employment is concerned. So would the NHC coverage be 10/12 essentially counting them as 1 person each in the numerator but counting them as 2 people each in the denominator (1 as ABC ee, 1 as LLC ee)?? I realize it will pass either way, but next year the LLC #s may increase.
2. Mr. A and his wife are eligible for the ABC Plan, yet assuming they have compensation from the LLC, that portion of their work/compensation is excluded from the plan. How does question #1 apply to them?
3. Does the LLC compensation that is excluded for allocation purposes have to be tested for reasonableness, to prove the exclusion is not discriminatory? or does the LLC compensation have to be included for allocation purposes, i.e. added to their ABC Corp compensation for allocation purposes (SH, TH Min, PS)?
4. Presuming the LLC Compensation is excludable, is 401(a)(4) testing done only with respect to ABC Corp compensation? or is the LLC compensation added in for Avg Ben, Rate Group testing purposes?

Thank you!

[cheersmate]

Does anyone have any input?

Thank you

[Mike Preston]

You don't count people twice.  You test for reasonableness only if you are testing whether the definition of compensation satisfies 414(s).  You use any 414(s) definition of compensation to satisfy a4.

[cheersmate]

Thank you, Mike.

It is a Relius plan document and per it, compensation from Affiliated Employers is excluded for Plan purposes if the Affil. Er. has not specifically adopted the Plan.  In this case it has not.

The 2 LLC Members have earned income that will not be counted for the Plan allocations and a4 testing

There are also 3 rank and file employees who have W2 from both companies, so the LLC W2 will not be counted for Plan allocations and a4 testing. Hours for elig and vesting will be counted from both entities.

... the excluded amount for 1 of the 3, ie the excluded LLC W2 amounts to more than 50% of his total combined.

I am still confused on the 410b testing -- how are the 3 rank and file employees who are participating via their Corp employment counted wrt to their LLC employment?

2 HCEs in Corp eligible, participating  Same 2 are not participating wrt LLC employment

10 rank and file in Corp eligible, participant.  Of the 10 3 are not participating wrt LLC employment.

Is 410(b) essentially 100%, but must be reasonable compensation -- is that what you saying?

 

Thank you again.

 

 

 

[cheersmate]

On 3/24/2017 at 4:22 PM, Mike Preston said:

You don't count people twice.  You test for reasonableness only if you are testing whether the definition of compensation satisfies 414(s).  You use any 414(s) definition of compensation to satisfy a4.

The 2016 Census Data is in and this is the "head count"

                        Corp(Plan Sponsor)   LLC (non-adopt Affil Er)             TOTAL

HCE Eligible                  2                           2 (same 2 ppl in Corp)          ??

HCE Participating          2                           0                                             2

NHCE Eligible               17                          2 (same ppl in Corp)             ??

NHCE Participating       17                          0                                            17

410(b) 

(NHCE total participating / NHCE total elig)  --> 17/?? (what is the denom?)

                        Divided by

(HCE total participating / HCE total elig) --> 2/?? (what is the denom?)

--> NHC % / HCE % must be at least 70% for the exclusion of the LLC to pass 410(b)

 

For a4, wouldnt the compensation be only the Corp compensation since LLC is excluded?

 

Thank you

[Mike Preston]

You don't count people twice. 410(b) is easy: 17/17 / 2/2 = 100%. For plan purposes you use compensation defined in the plan. For a4 purposes you use a 414(s) definition of comp.