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No one really knows. Derrin Watson the guru of gurus in regards to such issues has the following posts in the Q and A section the Benefits Links Half-Year Exclusion for ASGs (Posted February 22, 2003) Question 252: A corporation is not a component member of a controlled group for a given year if the corporation is not a member during at least half of the days that precede December 31. Are there any such rules for the purpose of determining affiliated service groups? What if a service corporation is a member of an affiliated service group on January 1 but terminates its affiliation with the service group in March? Answer: I fear you are laboring under a misapprehension about controlled groups. Let me do my best to rectify it. so you will then understand my response for ASGs. It is true that IRC 1563(b) contains the component member rule you describe. (Q 9:5. References to "Q" are to numbered questions addressed in the third edition of Who's the Employer; they can be viewed online by subscribers.) Thus, for ordinary income tax purposes, if you are in a controlled group for half the year, you're in, and if not, you're out. But this rule is totally irrelevant for retirement plan purposes. (Q 9:3.) See Reg. 1.414(b)-1(a). Effectively, this means that controlled group status is determined on a day-by-day basis for retirement plan purposes. (Q 9:11 and Q 11:11.) Does it then come as any surprise that no similar half-year rule exists for ASGs? Like controlled groups, affiliated service group status is determined on a day-by-day basis. If ownership changes or a relationship ends to terminate ASG status, then from that point on the businesses are separate but before that date they are treated as a single employer. This result is unsatisfactory in many respects, but it is unquestionably the result that the law provides. Filing for Midyear Changes in Controlled Group Status (Posted September 8, 2001) Question 125: Parent Company sells one of its subsidiary companies, Company B, in a stock sale on November 15, 2000. Company B continues as a participating employer in Parent Plan until March 1, 2001 when it establishes its own Plan and a transfer of assets from Parent Plan to new Company B Plan occurs thereafter. Parent Plan realizes it needs to be treated as a Multiple Employer Plan for January 1, 2001 - February 28, 2001. The question is whether it is also a Multiple Employer Plan from November 15, 2000 - December 31, 2000, or may it continue as a controlled group plan for 5500 reporting and testing purposes through December 31, 2000 by treating Company B as an additional component member of the group for the entire 2000 Plan Year under rules akin to the additional component member rules of Code Section 1563(b)(3)? Answer: IRC 1563(b) contains several important rules to make the controlled group system more rational and easier to administer. These rules say that if you are in a group for half a year, you are a component member of the group for the whole year. They also remove foreign corporations as component members of controlled groups, and effectively eliminate overlapping groups. And none of those rules apply for qualified plan purposes. None of them. Why? IRC 414(b) refers to members of a controlled group, not to component members. 414(b) only changes component member status, which is used for normal income tax returns and not for qualified plans. The regulations confirm this: For purposes of this section, the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a) (1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). [Emphasis added.] That's what the law is, and it is quite clear. Unfortunately, the regulations have been less than specific about what to do when you have midyear shifts in controlled group status. The 5500 instructions are completely silent on the point. Fortunately, it should not be much of an issue here. The only difference between filing for a multiple employer plan and a single employer plan is that you must file an extra Schedule T to show testing for IRC 410(b). That extra schedule T for the two months in question should be quite easy to fill out, because the plan should qualify for the free pass of IRC 410(b)(6)(C). Fill out the front page, check box 3e, and it's done. Of course, having said that you have a free pass of IRC 410(b), that does not mean you have a free pass for IRC 401(a)(4). Technically, for the two month period, the two must be tested separately. I know of no guidance on how this is to be done. Make a reasonable choice and it is unlikely you will be challenged. .................................................. the topic has also been discussed to a degree in the following: https://benefitslink.com/boards/index.php?/topic/4578-plan-sponsor-no-longer-member-of-controlled-group/ https://benefitslink.com/boards/index.php?/topic/10442-410b-transition-rule-and-adp-testing/ ....................... good luck.

Yes. A safe harbor plan is considered not top heavy only if it consists solely of deferrals and safe harbor contributions (see 416(g)(4)(H)). Once you start adding in other contributions you are subject to the regular top heavy rules. One option would be to add a second plan just for the PW contributions. As long as no key employees are eligible in the PW plan, the two plans would not have to be aggregated for top heavy.

Did you earn more than $120,000 during 2016?

to add to Madison's comments: my mental anguish is that the distribution takes place in 2018, so it is the 2018 1099R form that is used, but you don't see that until next year, it is simply the person still reports the excess deferral in 2017 even if it was refunded timely! but you have no 1099r yet to indicate it at the time you file the taxes. or at least that is how I understand it works. and yes early withdrawal applies, here is the IRS example https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed IRC Section 72(t) imposes a 10% additional tax for distributions that don't meet an exception, such as death, disability or attainment of age 59 ½, among others. To avoid this additional tax, correct excess deferrals no later than April 15 of the following year. If you don't correct by April 15, you may still correct this mistake under EPCRS; however, it won’t relieve any Section 72(t) tax resulting from the mistake. Under Revenue Procedure 2016-51, Appendix A, section .04, the permitted correction method is to distribute the excess deferral to the employee and to report the amount as taxable both in the year of deferral and in the year distributed. These amounts are reported on Forms 1099-R. In the case of amounts designated as Roth contributions, the excess deferral will already have been reported in income in the year of deferral. However, the amount will be reported as taxable in the year distributed. Example: Employer X maintains a 401(k) plan that has 21 participants and plan assets of $715,000. For calendar year 2017, Ann deferred $18,500 to the plan. None of the elective deferrals were designated as Roth contributions. Ann is under age 50 and isn't eligible to make catch-up contributions. Ann has excess deferrals of $500 because $18,000 is the 402(g) maximum amount permitted for 2017. Employer X didn't discover this mistake until after April 15, 2018. On November 1, 2018, X distributed the excess deferral (plus earnings of $10, totaling $510) to Ann. For 2017 (year of deferral), Ann must include $500 in gross income. For 2018 (year of distribution), Ann must include $510 in gross income. Employer X would report this amount on Form 1099-R. In addition, Ann must pay the additional 10% early distribution tax under IRC Section 72(t). and note from the 1099 instruction for 2018, the far right column indicates other codes that can be used (1 = early withdrawal) 8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2018. Use Code 8 for an IRA distribution under section 408(d)(4), unless Code P applies. Also use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless Code P applies. See Corrective Distributions, earlier, and IRA Revocation or Account Closure, earlier, for more information. 1, 2, 4, B, J, or K

You are correct that if excess is in one plan than it must be distributed. Post 4/15 results in double taxation - reported on 1099-R as excess deferral in 2017 - code P I believe with whatever other applicable Code (Code 1, 7, etc.) and 2018 (assuming it is distributed this year) for the year of the actual corrected distribution (excess deferral plus earnings) - code 8 with whatever other applicable Code. There may be a 10% penalty depending on the age of the participant. There would not be 20% mandatory withholding because the amount is not eligible to be rolled over.

jkharvey, from time to time I've had reason to think a little about this or at least similar issues. I don't think you are going to be able to find anything in ERISA or the Code specifically on point. In asset sale transactions, the buyer usually wants the seller to terminate the plan, but occasionally the buyer will want the seller's plan and the deal documents will say that the seller will permit assumption of the buyer's plan, and the plan may be amended before the assumption to make clear that this is permissible. Although in that context, allowing the seller's plan to be assumed by buyer and merged into buyer's existing plan seems to have a more obvious business purpose, it is still the case that, as in your circumstances (which, as Bird points out, you haven't yet fully explained), the plan sponsor is essentially permitting another company to become the sponsor, in effect transferring sponsorship. Again, there may be case law where this has been an issue, but I am not aware of any provision of ERISA or the Code that would bear directly on this. IRC sec. 414(l), for example, merely provides the standards for what happens in a plan merger, not when you can do a plan merger. Your risk would be that an employee who wants a distribution based on his/her termination of employment sues to get it, saying that the plan document's rules for distribution on termination had not been followed, or that the buyer commits a fiduciary breach after the transfer of sponsorship/merger and the employees who lose money because of the breach sue saying that the seller's allowing the buyer to take over the plan was a failure to follow plan documents and/or a breach of fiduciary duty.

This sounds like a pretty clear case of an operational failure - a participant was allowed to contribute before satisfying the plan's eligibility criteria. As long as it's corrected before the end of the second plan year following the plan year in which the failure occurred (i.e., before the end of 2019) then I don't see any reason why SCP wouldn't be allowed. I agree with Lou, you should adjust the contributions for earnings and return them to the participant with code E.

Does your plan still have active employees? It's not really clear what is going on; you say there is no transaction between employers but yet one seems to have terminated some or all of its employees and the other has hired them. You could do a spinoff of some assets and merge into another plan. I'm not sure if that is better or worse than just treating the employees as terminated and letting them roll their accounts into the other plan as they desire. A merger means the participants have no choice.