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Adoption of plan by new controlled group member = "plan amendment" under 1.401(a)(4)-11(g)?


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Corporation A has a calendar year profit sharing plan (elective deferrals not permitted) using ftwilliam nonstandardized plan document, which does not automatically include controlled group members and says controlled group members "must adopt" plan with approval of plan sponsor in order to participate. A became a member of a controlled group with B in 2020. B has no plan and A's plan will fail 410(b) for 2020 without including some of B's employees. If A adopts resolutions approving B's adoption of A's plan, and then B adopts it and B's employees share in allocations with A's, is that a 1.401(a)(4)-11(g) amendment? I'm thinking yes, but wanted to poll others on the topic. I don't know whether B extended its 2020 return, but I guess if it did SECURE Act addition of 401(b)(2) would also apply.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Seems to me it should work, the SECURE Act language just says adopt “a plan”, not “a new plan”.  But AFAIK there is no guidance.  Another option would be for B to simply adopt its own PS plan and then permissively aggregate the plans for testing. 

I carry stuff uphill for others who get all the glory.

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On 7/30/2021 at 7:55 PM, shERPA said:

Seems to me it should work, the SECURE Act language just says adopt “a plan”, not “a new plan”.  But AFAIK there is no guidance.  Another option would be for B to simply adopt its own PS plan and then permissively aggregate the plans for testing. 

Right. So shERPA implicit in what you are saying perhaps is that you feel the 401(b)(2) adoption route is more "secure" than relying on 1.401(a)(4)-11(g) because technically the adoption of a plan is not an amendment?

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 7/31/2021 at 2:06 PM, Mike Preston said:

410b6c?

Mike, thanks. I left out of facts that the affiliation occurred because a roughly 1/3rd owner of B was redeemed out (other entity owned 50/50 by remaining two shareholders of B, who own A 50-50, basically). The caption to 410(b)(6)(C) says it applies in the case of "dispositions or acquisitions," and Reg. Sec. 1.410(b)-2(f) seems to define "dispositions or aquisitions"  in a way that would exclude this sort of realignment from being one, although it's really not all that clear.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Prior discussion, which leaned towards the conclusion that adoption of a participating employer agreement is an amendment, not a plan adoption:

The safest way to approach it might be to have B adopt a new plan, permissively aggregate the two plans for testing, then merge them into a single plan later on.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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17 hours ago, Luke Bailey said:

Right. So shERPA implicit in what you are saying perhaps is that you feel the 401(b)(2) adoption route is more "secure" than relying on 1.401(a)(4)-11(g) because technically the adoption of a plan is not an amendment?

Yes, I suppose so.  There is clear authority to adopt a plan retroactively without even invoking -11(g).  There is no question adopting a new plan is permissible, the question is whether B adopting A's plan comes under this new authority. 

Ideally if -11(g) was being drafted or amended post-SECURE, it would address this.  Section 201 of SECURE says "the employer may elect to treat the plan as having been adopted as of the last day of the taxable year."   Who is the "employer" in this regard, each separate entity or the aggregated CG employer?   Either way you consider "employer",  adopting a new plan retroactively works.   OTOH if you consider the "employer" to be the aggregated entity, it already sponsors the existing plan, which could imply that adding B is more of an amendment than an adoption.   Of course if it is an amendment then why can it be done under authority of -11(g) (except maybe the deductibility is not retroactive?).  But then if each entity is filing separate tax returns then maybe B adopting A's plan is an amendment for -11(g) purposes, but then B as a separate taxpayer can invoke 401(b) as amended and elects to treat its adoption as being done as of the last day of the year for deductibility.

IMO it should work per my second paragraph, but it might need to be defended under exam, and if an employer has to fight the IRS on this they've already "lost" in terms of dollar cost, anxiety and distraction.  So I'd advise a client in this situation to adopt a separate plan now to avoid the issue.  But if I came across a client that did it the other way I wouldn't tell them it's wrong, I'd just explain there's no guidance, if you put the pieces together it should be OK, but the pieces came out at different times and IRS may not agree.  

I carry stuff uphill for others who get all the glory.

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Thanks, C.B. Zeller. The analysis in Ilene's and Derrin's posts confirms what I had feared regarding whether IRS might take the position that adoption of A's plan by B is an "amendment" not covered by 401(b)(2). Crazy result at the end of a logical chain of thought. Or maybe not so crazy if Congress's purpose in enacting 401(b)(2) was only to encourage new plans and not to help with corrections of plan defects.

But does IRS end up sort of having it both ways in this situation? If Company A's amendment of its plan to cover employees of its controlled group member, B, and B's adoption of the plan, is not covered by 401(b)(2) because not a plan "adoption" for purposes of 401(b)(2), then the amendment should be covered by 1.401(a)(4)-11(g), right? Or perhaps IRS would say, yes, there is here an amendment by A of its plan, which might be covered by -11(g), but the required adoption of the plan by B is a separate step that is not covered by -11(g)? Maybe that's why, as stated by Ilene, IRS says you need to fix in VCP.

I am going to post some offshoot questions to a couple of new threads.

Thanks also shERPA. Your analysis of the issue is consistent with mine. I would way we're overthinking it, but more often than not that is how the law actually shakes out in these situations.

FYI, it turns out that A and B in my post did not extend their returns, so 401(b)(2) is out anyway.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Not helpful at this point, but perhaps interesting, the Securing a Strong Retirement Act that was introduced in the House a few months ago would add another subparagraph to 401(b) that allows retroactive amendments up until the plan sponsor's tax deadline.

The SSRA includes lots of other goodies that testing nerds like us will love, including allowing otherwise excludable employees to be disaggregated for top heavy, getting rid of the rule that creates controlled groups when there is a child under age 21, and allowing sole proprietors to make retroactive deferral elections when there are no other employees in the plan. No way of knowing if this bill will actually go anywhere, but it at least shows that Congress is aware of these issues.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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44 minutes ago, C. B. Zeller said:

Not helpful at this point, but perhaps interesting, the Securing a Strong Retirement Act that was introduced in the House a few months ago would add another subparagraph to 401(b) that allows retroactive amendments up until the plan sponsor's tax deadline.

The SSRA includes lots of other goodies that testing nerds like us will love, including allowing otherwise excludable employees to be disaggregated for top heavy, getting rid of the rule that creates controlled groups when there is a child under age 21, and allowing sole proprietors to make retroactive deferral elections when there are no other employees in the plan. No way of knowing if this bill will actually go anywhere, but it at least shows that Congress is aware of these issues.

Right, great for the "testing nerds," but C.B. Zeller, what will all of the "correction nerds" do if correction becomes too easy? 😀

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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I have no doubt that the ability of plan sponsors to foul up their plans in new and innovative ways will continue keep us all busy for the foreseeable future. :lol:

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Can you pass 410b utilizing average benefit test approach by increasing contributions to participants of A which would be done under 11-g correction? As A filed their return without any extension (and so did B), deductible for 2021.

Also, which option for correction methodology was selected on FTW document, custom or based on the document provisions?

Assuming that it can be corrected by VCP, can it be done by 10/15/2021 deadline (not sure if any deadlines imposed for VCP correction before a deadline)?

Sorry if I missed these comments/suggestions and not being viable.

Thinking out loud and curious.

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J

22 minutes ago, Jakyasar said:

Can you pass 410b utilizing average benefit test approach by increasing contributions to participants of A which would be done under 11-g correction? As A filed their return without any extension (and so did B), deductible for 2021.

Jakyasar, thanks. If I can treat Corp. B as in the plan for 2020 and give some it semployees an allocation, we'll be good.

23 minutes ago, Jakyasar said:

Also, which option for correction methodology was selected on FTW document, custom or based on the document provisions?

Not sure. I will need to check document. Good point.

24 minutes ago, Jakyasar said:

Assuming that it can be corrected by VCP, can it be done by 10/15/2021 deadline (not sure if any deadlines imposed for VCP correction before a deadline)?

I'm sure it can be corrected in VCP, but trying to avoid.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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On 8/1/2021 at 3:40 PM, Luke Bailey said:

Mike, thanks. I left out of facts that the affiliation occurred because a roughly 1/3rd owner of B was redeemed out (other entity owned 50/50 by remaining two shareholders of B, who own A 50-50, basically). The caption to 410(b)(6)(C) says it applies in the case of "dispositions or acquisitions," and Reg. Sec. 1.410(b)-2(f) seems to define "dispositions or aquisitions"  in a way that would exclude this sort of realignment from being one, although it's really not all that clear.

Luke, there are a number of current threads that revolve around this discussion, so if you want to sprinkle this to another thread or two or three.... feel free.  While there is no formal guidance I'm aware of, in informal discussions with IRS at conferences and the like I think you will find that the IRS has expressed an extraordinary willingness to consider just about anything as an inclusive disposition or acquisition under 410b6C.  In fact, I think you will be hardpressed to find any circumstance where the IRS has opined negatively.

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