owner employee within controlled group

[Guest meggie]

A controlled group contains 2 employers, each of which sponsor separate DB plans. The owner of the controlled group is an employee in each of the plans, collecting a separate salary and supposedly earning service under each of the plans. My initial reaction is that if the owner is sharing his time between the 2 companies and therefore accruing benefits under each in accordance with the plans- the following tests would need to be done to see if there are any restrictions:

Need to aggregate the benefits under 415.

Need to aggregate plans and test as one under 401(a)(4)- nondiscrimination.

Can anyone think of any other pitfalls? Should I be checking 401(l) if the plans are integrated with Social Security? I don't know what the benefit formulas are under each plan, other than they are salaried plans and one plan's average pay is capped at 75,000. There is no cap in the other plan. The employee makes more than 200,000 in salary for each of the employers.

I took a look at RR99-51- which states that "on the basis of all relevant facts and circumstances, the manner in which employees' service is credited for all purposes under the plan must not discriminate in favor of HCEs."

Thanks

[AndyH]

Quick list:

401(l), yes

415 YES. Absolutely

Aggregate for aggregate for 401(a)(4): Not necessary if they pass 410(B) separately

Biggest potential problem is 401(a)(26)

I'm sure there are other issues, but the first one I'd look at is 401(a)(26)

[Guest meggie]

Thanks Andy H for your response- the benefit formulas are not integrated with Social Security. Even though there are 415 and 416 issues to deal with- it appears if this employee is a common law employee under both plans and accruing service under each plan simultaneously- he could very well be a participant under both plans as long as each plan passes coverage, participation and nondiscrimination. What is gnawing at me is if the plans are combined for testing- then there is a duplication of benefits???

AndyH said that 401(a)(26) might be a bigger problem. Could someone elaborate? I think 401(a)(17) comp limits would not be affected since these are separate plans and 401(a)(17) is a plan limit????

Thanks again

[AndyH]

Meggie, please clarify your situation. In your first post, you indicated the person in question was the owner. In your second, you said he was a common law employee.

What exactly is the situation and what perspective are you looking at it from? Are you worried from the company's perspective, or this person's perspective? Are you viewing this from the perspective of representing these companies as clients?

What is your angle?

There are shared employee rules that I have read but cannot recite off the top of my head, but I think this depends upon the person in question's status.

Regarding 401(a)(26), do 50 or more employees benefit in each plan? If not, do 40% benefit in each? If neither, you flunk 401(a)(26) if these plans are active. You then have one or more disqualified plans. What could be a bigger issue than that?

And, BTW, yes, you are right about 401(a)(17).

[Guest meggie]

Sorry for the confusion.. Maybe common law employee is not the right term? This person is an active participant in 2 DB plans funded by 2 separate employers which is under one controlled group. The employee is also owner of the controlled group of those same employers.

Can he conceivably be participating in 2 plans at the same time? I'm saying yes as long as he is getting pay for service earned in each plan and he meets the participation and service rules under each plan. It could get messy if need to combine the plans for testing but if each plan passes testing- then need to look at 415 and 416 which would require combining the 2 plans.

I'm thinking that I'm overlooking something else- because my gut reaction is that this arrangement smells discriminatory. Could there be something in the DOL regs on service?

Thanks

[AndyH]

Meggie, I think the arrangement you've described is fine if it meets the various requirements outlined here, in particular 401(a)26 and 410(B). In fact, if my memory serves me correctly, there was an article published in one of the ASPA textbooks (C-4 I think) which suggested this approach as a way of addressing the 401(a)17 limit. And I think it was written by Lorraine Dorsa, moderator of this board.

I hope my facts are correct, but I think so. You can try emailing her if you don't have access to the C-4 study materials, "Current Topics for the Retirement Plan Consultant" was the reading compendium if I recall correctly.

I can confirm the article title tomorrow, at which time I'll have access to my copy.

P.S. The multiple plan approach was actually in an article which followed Lorraine's. It was in an article written by Maria Sarli and Dennis Coleman of Kwasha Lipton entitled "Planning Opportunities to Maximize Benefits for Key Employees Under Qualified Defined Benefit Plans" which started on page 579 of the book. The multiple plan idea is not a large part of the article, however.

[Guest meggie]

AndyH, Lorraine Dorsa does not recall any article in C-4. Any other suggestions?

[AndyH]

Meggie, I think the design is fine if you meet all the requirements above, plus each plan is either a safer harbor or passes general testing and the plans pass coverage. But, 401(a)(26) seems to me to be an obstacle which would be different to overcome.

And, Lorraine's article is certainly in the book, but it's a re-print and it's old, so maybe that why she doesn't know it's there.