Controlled groups and separate plans

[bzorc]

Here is a situation that I have recently encountered that I have never seen in my years in the business. Any comments would be appreciated!

Companies ABC and XYZ are in a controlled group situation, and currently all eligible employees of each company participate in a Money Purchase, Profit Sharing, and 401(k) plan (3 plans total). Unknown to our firm, the client's attorney adopted a 4th plan in 1997 (or so), a Profit Sharing plan strictly for the employees of XYZ. However, the plan has $0 in it, as XYZ has been making its profit sharing contribution to the combined profit sharing plan.

Skip forward to 2001, where ABC has encountered a loss year and does not wish to make a profit sharing contribution (it will fund its mandatory MP plan contribution). XYZ is profitable, however, and desires to make a Profit Sharing contribution for 2001. The attorney has now come in, and is advising the client to move XYZ's portion of the combined plan assets out of the combined PS plan and into the 1997 plan set up strictly for the XYZ employees. The XYZ employees will remain in the combined MP and 401(k) plans. The attorney also wishes to take the PS plan forfeitures attributable to terminated XYZ participants and transfer it over to the XYZ plan as well. The plan assets are not segregated by employer, they are commingled. The attorney feels (and we agree) that a profit sharing contribution can be made and still pass IRC section 410(B), as the majority of HCE's are employed by ABC.

We are uneasy with this situation. Concern #1 is whether the separate XYZ plan still exists, or was terminated due to lack of substantial and recurring contributions. Concern #2 is if the assets of the plan indeed transfer from the combined plan to the separate plan, are we creating a partial plan termination in the transfer.

I don't know if there is anything to worry about, but this situation does not feel right. Any thoughts? Thanks.

[mbozek]

Concern # 1- Not a problem since IRS rules allow a PS plan to defer contributions for 5 consecutive years before discontinuance for failure to make contributions. See IRS guidlines on plan terminations.

Concern #2- Maybe a partial termination but only consequence is that affected participants must be 100% vested. Since participants have up to 5 years of service (97-01) this should be no big deal.