plan audits

[Guest CAM223]

A company has a 401k plan with less than 120 participants. They have acquired a

second company. When the second company's employees become eligible they will have well over the 120 participant count that requires an audit. Is there any

problem in establishing a second identical plan for the new company's employees to avoid the audit requirement for both plans? Is there any problem in including

all new hires in the original company in the second plan to assure that the first remains below the audit level of 120 participants?

[austin3515]

As long as the assets are not commingled you should be okay. I'd issue a strong caveat that there better be a legitimate business reason for separate plans (i.e, two different companies/divisions). You don't want it to look like the point of the arrangement is to avoid an audit. I don't think that's a good way to make friends with the DOL.

What's more, I'm not sure you'd save much money considering the cost of admistering two plans is probaly close to double the cost to administering one plan for everyone...

[Guest Pensions in Paradise]

I'd issue a strong caveat that there better be a legitimate business reason for separate plans (i.e, two different companies/divisions).

Could you expand on your reasoning behind this statement. There is nothing that prohibits a company from establishing more than one plan. For example, if a company wanted to it could establish one plan for management, one plan for staff, and one plan for janitors. There does not have to be a "legitimate business reason" for doing so.

Obviously the company would have to consider the higher costs of administering separate plans, but from my experience the administrative cost of a second plan would be significantly less than the cost of an audit.

[AndyH]

I see no reason why they can't have two identical plans, but based upon the eligibility criteria described the plans may need to be aggregated for testing purposes.

Yes, it might avoid an audit but not much else, plus the cost of two plans might outweigh the savings from avoiding the audit.

[Lori Friedman]

SWHT

Andy, I'd love to join in this discussion, but I have to go get randomly tested for steroid use.

[AndyH]

SWHT

Thanks for the SWHT! Saved me lots of time figuring out what you meant.

[austin3515]

My only point is that if you design the plans solely to avoid the audit requirement that you might upset the DOL. Let's say you had one plan with 130 people, and then you break the Plan into 2 plans for no good reason. Wouldn't that raise some red flags? I wouldn't do it, that's all. No regs to cite, because there are none.

[AndyH]

Understood, but the counterpoint is that we don't think that the DOL would have any basis for being upset. It is perfectly within the rules.

[Kirk Maldonado]

Lori:

Be careful of that drug use; look what happened to Blinky!

[JanetM]

Maybe I need Lori's drugs.... still trying to figure out what SWHT means.

Just sign me Dazed and Confused in Denver.........................

[AndyH]

SWHT

Guess Janet's been out at Zepplin concerts instead of the Boards.

See Lori, guess Harwood had a point. We all need to Stop Wasting Harwood's Time.

http://benefitslink.com/boards/index.php?s...ic=28029&st=30#

[JanetM]

Am thinking that I am still getting used to the altidude here in the Mile High City.

Thanks AndyH!

[Blinky the 3-eyed Fish]

Lori:

Be careful of that drug use; look what happened to Blinky!

What happened? I haven't seen a mirror lately. Am I alright?

Janet, who is altidude and why do you need to get used to him?

[AndyH]

SWHT

Page or Plant?

[JanetM]

opps make that altitude................

[Kirk Maldonado]

JanetM:

Don't worry, you'll adjust to the altitude here in Denver. It only took me about 18 months to adjust. Pretty soon nobody will be able to telllllllllllllllllllllllllllllllllllllllllllllllllllllllll.

[JanetM]

Thanks Kirk - 18 months? OMG that means I could still have a year to adjust.

I just figure for the next few months I will always wear blue so the oxygen deprivation isn't as appearant.

[Guest Willie]

These types of posts actually waste other people's time as well. I LOVE sports but that's not why I come to this site. I usually take a couple of minutes during my lunch hour to read these boards and it is frustrating when I have to sift through all of this banter to find legitimate answers to the posters question. Isn't there another forum on the site that could be used to discuss sports and argue with other posters over non-pension related issues?

[Blinky the 3-eyed Fish]

Aren't post complaining about people wasting time a waste of time themselves? I think of them like the technique of back burning a forest fire. You are actually lighting a fire, which is what you are trying to put out in the first place, and sure it could help to put out the fire and prevent further damage. However, the winds could shift and the back burn could even start a bigger fire.

It always seems to be windy in here.

[austin3515]

I agree with Blinky. See what you've started? Now do you understand? The purpose of these boards is whatever we want it to be!!

Leave your message board dictatorship political ideals at the door thank you...

[JanetM]

Blinky & Austin, thank you both for making that point. A little fun and levity serves to keep us all sane........

[E as in ERISA]

I have had a long-standing concern with these Boards that there are some people who think that they can come here and get advice that they should be getting from legal counsel or other service providers. (It's mostly non-practioners -- those who aren't regulars -- who I'm primarily concerned about. This is not aimed at anyone on this post). I think that the Boards should be plastered with messages reminding people that any comments made here should not be considered legal advice (same as what you would see on any practitioner's web site).

On the other hand, I think that the Boards are an invaluable tool for sharing news, thoughts, practical experience, opinions, interpretations among practioners with a variety of experience. And in that context, I think that a certain amount of friendly banter is to be expected.

SWH&WTBFFTWKT!!!

(Stop wasting Harwood's & Willie's Time But Feel Free to Waste Katherine's Time!!!)

[Guest Willie]

I appreciate both of your opinions and also enjoy a little humor now and then. I have limited time during the day and this site has great information. It just gets a little frustrating when you have to read so many posts to find the answer and I was merely asking if another forum within the site would be more appropriate.

[AndyH]

SWH&WT

Thanks for the moral support, Katherine et al.

Now, about those people who post pictures of MAMMALS, REPTILES, FELINES, AQUATIC CREATURES, CARTOONS, MOVIES, ANIMATIONS, BABIES, SISSIES, ACRONYMS, ETC. Stop misdirecting my line of vision which would obviously be more productive studying your thesis-like contributions and legal advice!

[BeckyMiller]

Going back to the question - there is an old DOL Advisory opinion. I can't remember the number, but it was issued to the Kindel & Anderson law firm, that dealt with this question. If I recall, it implied, but did not specifically hold that if one plan needed the other to be considered qualified under the Code, that the DOL would consider them to be a single plan.

[Kirk Maldonado]

The letter that Becky referred to is ERISA Opinion 79-87A, which was issued Jim Carey of Kindel & Anderson (which was a law firm based in Los Angeles that no longer exists).

However, I didn't see any reference to the plans being aggregated for tax-qualfication purposes in the DOL's discussion of the issue. Rather, the DOL focused upon whether the plan's provisions contemplated that all of the component plans be treated as a single entity.

But, inasmuch as that letter was issued more than 25 years ago, I think that it is completely understandable that Becky Miller's memory was a little bit off. Hell, I'm impressed that she even remembered it!

In any event, here is that letter:

ERISA Opinion Letter 79-87A , 12/13/1979

Mr. James F. Carey

Kindel & Anderson

Twenty-Sixty Floor

555 South Flower Street

Los Angeles, California 90071

Dear Mr. Carey:

This is in response to your request for an advisory opinion regarding the interpretation of 29 CFR 2520.104-46 , under which the requirement set forth in section 103(a)(3)(A) of the Employee Retirement Income Security Act of 1974 (ERISA) that an accountant's opinion be included in the annual report is waived for plans with less than 100 participants. We regret the delay in responding to your request.

The following is a summary of the representations contained in your letter and material provisions of the documents submitted therewith. A document encaptioned “1976 Amendment and Restatement of Metal Surfaces, Inc. Employee Profit Sharing Plan” (the Plan) was adopted by Metal Surfaces, Inc. (the Company) and one of four of its subsidiary corporations. The Plan provides that any corporation which is or may become an 80% or more owned subsidiary of the Company may become a “Participating Employer”. The other three subsidiaries of the Company thereafter adopted the Plan and became Participating Employers.

Contributions by Participating Employers and by employees are held in a trust maintained in connection with these profit sharing programs (the Trust). Under the Plan document, the board of directors of each Participating Employer determines the amount, if any, to be contributed by that Participating Employer on behalf of its employees. A separate account is maintained for each employee who is a participant in one of the profit sharing programs maintained pursuant to the Plan document, and the participant's share of Participating Employer contributions, forfeitures, and gains and losses on assets held in the Trust are credited to the participant's account. Contributions to the Trust by each Participating Employer are generally allocated only to the accounts of that Employer's employees. Under §5.01 of the Plan document, however, it appears that if the profits of one of the Participating Employers are not sufficient to enable that Employer to make contributions, other Participating Employers may make contributions on behalf of that Employer's employees. Forfeitures from the account of a former participant are allocated only among eligible participants employed by the Participating Employer who employed the former participant. For investment purposes, it appears that all the assets in the Trust are pooled. Gains and losses on the pooled assets are allocated among participants' accounts on the basis of the ratio of each participant's account balance to the sum of the account balances of all participants. Only the Company may terminate the Plan. A Participating Employer may withdraw from participation in the Plan only with the approval of the Company's board of directors. The Company may amend the Plan without approval of the Participating Employers.

Upon termination of the Plan, each participant becomes fully vested in his or her account. Thus, in the event of termination, the assets contributed by a Participating Employer for its employees will generally not be used to provide benefits for participants employed by another Participating Employer, except to the extent of contributions by a Participating Employer on behalf of the employees of a Participating Employer with insufficient profits, as described above.

On the basis of these facts, your letter raises the question whether, in determining the number of participants for purposes of 29 CFR §2520.104-46 , the profit sharing program maintained by each Participating Employer should be treated as a plan separate from the programs maintained by the other Participating Employers, or whether all the programs should be treated as a single plan.

In our view, under the circumstances described in your letter, and in the materials that accompanied it, the profit sharing programs maintained by the five Participating Employers under the Plan should be treated as a single plan in applying 29 CFR §2520.104-46 . The provisions of the Plan, taken as a whole, contemplate that the profit sharing programs of the Participating Employers would form part of a single plan for the purposes of the Company. The Company reserved to itself the sole right to amend and terminate the Plan, and to approve withdrawals of Participating Employers from the Plan. Further, the Plan provides that if the profits of a Participating Employer should be insufficient to make a contribution which such Employer is required to make to the Plan, other Participating Employers may make such contribution. Because the Plan provides for the pooling of all the assets in the Trust, and for allocation to each participant's account of a proportionate share of the gains and losses on such pooled assets, the financial information with respect to which an accountant's opinion would be required under section 103(a)(3)(A) of ERISA is relevant to all the participants. Given the provisions of the Plan, which contemplate that the profit sharing programs of the Participating Employers and the Company were meant to be treated as a single entity for corporate purposes, it is our opinion that the participants of each of the profit sharing programs should be aggregated for purposes of §2520.104-46.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 . Accordingly, this letter is issued subject to the provisions of the procedure, including section 10 thereunder relating to the effect of advisory opinions. We have considered your request for a conference under section 8 of the procedure and have decided that a conference is not necessary in providing this advisory opinion.

Sincerely,

Ian D. Lanoff

Administrator of Pension and Welfare Benefit Programs