Job hopping in a Controlled Group

[KateSmithPA]

I have a client who owns 3 companies. They are definitely a controlled group. Against my advice, the client insisted on setting up three separate 401(k) plans with three separate annuity contracts.

My problem is that some of the employees go back and forth between the companies so they end up with accounts in more than one of the contracts. The employer believes if an employee leaves Company A for Company B then that employee can take a distribution from her account at Company A because she is terminated. I'm really not sure that is the case. Another issue is loans. If a participant has a larger account balance in Company A's contract, but now works for Company C, can she take a loan from her account at Company A and have payroll deduction for the loan payments at Company C?

I'm afraid I am missing something very fundamental here. Thank you in advance for any guidance.

[Guest earthy]

If this employer is a controlled group then the job hopping needs to stop. This is a single employer for many purposes under the 401(a)(4) regs.

If the employee's terminate and hold the same desk and perform similar functions in the other companies within the controlled group, the IRS would deem they are holding the same desk and in essence have never separated from service or terminated. They may not yet be entitled to distributions.

The loan issues you raise may involve prohibited transactions.

Be sure you aggregate all of the 401(k) deferrals for 402(g) limitation purposes and for ADP testing purposes.

Refer this group to their legal counsel and the Code Section 1563(a) rules.

They should have sponsored a single 401(k) plan from the get go and filed a single determination letter as to the plan's qualified status.

earthy

[jaemmons]

You may not have a problem here, but it depends on what the document stipulates as to who the employer is. If the employer is the control group but each member sponsors its own plan, as long as you are passing coverage and are able to demonstrate that there is no discrimination under 401(a)(4) for any benefit right or feature (no BRor F is more favorable in ANY plan to the HCE group on average) each plan can stand on its own. Also, if each plan passes coverage, the ADP/ACP testing is also performed with respect to each plan individually.

However, if an employee leaves one member to go to work for the other, I agree with "earthy" that you do not have a separation from service and the in-service rules for 401k deferrals would apply.

The loans I don't have a problem with, since all "like" plans of the employer are aggregated for ALL limit purposes, including IRC 72(p). Since they are all 401k plans, the aggregation applies. I would just make sure that the loan policy and trust agreement (you may want to set up a master trust for the plan but track each plan's benefits separately) to each document is the same with reference to recognition of all benefits of the employer.

Although I do not agree with this plan design, it may be doable, but a lot of testing needs to be performed, along with some special language to the plans' documents.