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Towanda

Transition Rule Applicable?

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A company with an existing 401(k) plan is preparing to create a wholly owned subsidiary.  The subsidiary doesn't yet exist.

The company wishes to create a separate 401(k) plan for the subsidiary. 

In the first year the subsidiary is being set up, it may consist of HCEs only.  In time they will have rank-and-file employees and combined plan testing should be fine.  The first year is my concern.

If the subsidiary and its plan do not currently exist, can we take advantage of the transition rule in the first year of the new plan?

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Is the subsidiary going to go out and buy a business from a third party?  If not, doesn't sound like 410(b)(6) was intended to apply to this situation.  What aspect of the pertinent regulation suggests to you that it might apply here? 

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57 minutes ago, Towanda said:

Ultimately we will have a controlled group.

 

I realize that, but it doesn't mean that 410(b)(6) relief will be available.

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I am not saying that it would not apply.  I just raised a doubt but I am not sure either way.  I merely suggested that you look at the regulation and share with us why you think it could apply.

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The regulation jpod is referring to is:

Quote

1.410(b)-2(f) Certain acquisitions or dispositions. Section 410(b)(6)(C) (relating to certain acquisitions or dispositions) provides a special rule whereby a plan may be treated as satisfying section 410(b) for a limited period of time after an acquisition or disposition if it satisfies section 410(b) (without regard to the special rule) immediately before the acquisition or disposition and there is no significant change in the plan or in the coverage of the plan other than the acquisition or disposition. For purposes of section 410(b)(6)(C) and this paragraph (f), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

 

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