Jump to content

403(b) plan sponsor purchases the stock of a for-profit corporation


Recommended Posts

I've never actually run into this situation before, (wish I hadn't now...) and I'm struggling with the implications.

A 501(c)(3) non-profit (let's call it Loquacious Lumberjacks) intends to purchase 100% of the stock of a for-profit corporation (let's call it Anteater's Anonymous). Clearly a controlled group under 1.414(c)-5(g), example 1.

LL sponsors a 403(b) plan, that includes a match. AA sponsors a 401(k) plan, about which I know nothing at this point.

Now, LL can continue to satisfy the Universal availability requirement of 403(b) by excluding employees of AA as permitted under 1.404(b)-4(ii)(B). 

However, when it comes to coverage/nondiscrimination testing, I'm not 100% sure how it works. It appears that under 1.410(b)-6(g)(3),  for coverage testing, AA is permitted to treat the employees of LL as excludable employees, as long as they meet a couple of requirements - (1) no employees of LL are permitted to participate in AA's plan, and (2) at least 95% of AA's employees are permitted to participate in AA's plan. Let's suppose they meet these requirements. And under 1.410(b)-7(f), for AA's purposes, contributions to LL's plan are disregarded if AA makes profit sharing contributions (although oddly, the reverse does not appear to be required).

LL does not make PS contributions, so that leaves only matching contributions. For the matching contributions under LL, it would seem that nothing in testing would change, since AA's employees are excluded for Universal Availability purposes, so cannot receive the match. 

I'm not at all certain that I'm not missing something. Any comments would be VERY appreciated.

 

Link to comment
Share on other sites

It sounds like you understand the lay of the land.

One thing to ask your client is whether AA is the first for-profit entity in the controlled group.  If there are going to be multiple for-profit entities, then be aware that Treas. Reg. Section 1.410(b)-6(g)(3) doesn't work unless all of the for-profit employees are in more plan (which may be an aggregated plan).

Also, as you already noted, that rule doesn't work if there are employer nonmatching contributions to the 401(k) plan for the for-profit employees.

Also, if you have to do any average benefit percentage testing in order to get a qualified (not 403(b)) plan to pass a test, this excludes contributions to the 403(b) plan, which can lead to funky results, so be wary that an ABPT test could have difficulties passing.

Link to comment
Share on other sites

Thanks M. A couple of things - this IS the first for-profit entity, fortunately. As to the ABPT testing in the 401(k) plan, essentially the ABPT is stand-alone for the 401(k) plan, right? So no more difficulties passing than if it was just an unrelated business? Or am I missing something else? Muchas gracias!

Link to comment
Share on other sites

Belgarath, the 403(b) contributions are excluded from the ABPT when the ABPT is performed in order to get a qualified plan to pass.  This might lead to unpredictable results.  It's fairly common where the 401(k) plan covers the for-profit employees that its population skews in favor of HCEs, making not just the nondiscriminatory classification test but also the ABPT a challenge.

Link to comment
Share on other sites

Thank you - yes, this can all get tricky. I do believe that the for-profit, (and it turns out that they do NOT currently sponsor any plan) if it does implement a 401(k), will only do deferrals and match, and not profit sharing. This would make things a lot easier. But all is in the investigation stage at this point.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...