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Does a controlled group member need to adopt the group's plan if the plan document says that it includes controlled group members automatically?


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Standardized preapproved plans are required to cover all controlled group members, but their adoption agreements usually provide for each controlled group member to execute the plan document, typically by using a page called a "Participating Employer Addendum." Having the "non-lead" employer sign an addendum to make clear its agreement to be included in the plan makes a lot of sense for collateral reasons (e.g., having a state law basis for requiring the controlled group member to pay its share of the plan's costs, including contributions other than elective deferrals; deductibility under Section 404 of contributions made by the controlled group member), but is it necessary to satisfy the Code? IRC secs. 414(b) and (c) state that the controlled group members are considered a single employer for purposes of Section "401" of the Code, thus seeming to forestall any argument that separate adoption by each controlled group member is necessary to satisfy the exclusive benefit rule.

Derrin Watson in Q 10:2 of the 6th Edition of "Who's the Employer" states unequivocally, I think, his conviction that adoption of the plan by the controlled group member is not required, and I'm inclined to agree with him, but because he cites no direct authority for this conclusion, I'm trying to gauge whether others have experience in the marketplace with IRS or other practitioners that would push back on this conclusion.

If separate adoption by the controlled group member is not required, then it would appear that an employer in a controlled group can potentially solve a 2020 410(b) problem created by a missed controlled group situation through the adoption in 2021 of a 1.401(a)(4)-11(g) amendment, I think.

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'd agree with you that logically if a standardized plan covers all members of a CG even with the action taken by just one member, that that sponsoring member should be able to amend the plan to fix it.   HOWEVER, IANAA, but I've never been comfortable with the concept of a standardized plan automatically covering all members of a CG.  I remember meeting a prospective client in California, a subsidiary of a Japanese parent company.  I had a fairly extensive fact finder, such that they had to send it to someone in the parent company to get some of the information needed.  Turns out this parent company had another subsidiary on the east coast, in a completely different industry, and neither subsidiary company knew of the other one.   One of them already had a 4k plan with a payroll company.  Fortunately it was a non-standardized document, but it could easily have been standardized.  Then what?   Can the omitted employees sue for benefits?  Their employing entity never signed up for the plan, how can they be obligated?  The parent?  The other subsidiary?  Seems like the corporate veil would likely protect them.  Standardized is just a creation of the IRS for administrative purposes of approving plan documents.  I've always wondered what would happen in court and how such a provision would be enforced.  And if it can't be enforced, is it a plan at all? 

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

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45 minutes ago, shERPA said:

I Am Not An Attorney.   Also frequently written as IANAL (Lawyer).  🙂

Ahah. BTW, not in the urban dictionary.

P.S., your legal reasoning is nevertheless excellent, IMHO.

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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