Exclusion of Members of a Controlled Group

[Guest PES]

There are eight nursing homes, all corporations and all owned 100% by the same owner. There is also a separate corporation to manage the 8 nursing homes, also owned 100% by the same owner.

The owner wants to implement a retirement plan to cover the management company, and one of the eight nursing homes. The owner is not interested in offering the plan to the other 7 nursing homes.

There will probably be only one HCE (the owner), but he will not be participating.

Can this be done? It seems to me that they will have a coverage problem if they do not offer the plan to the other 7 nursing homes, but I cannot get a handle on why this would be. Thanks for any help.

[E as in ERISA]

If all of the covered employees are NHCEs, then you may not have a coverage problem. See Regs. Sec. 1.410(B)-2(B)(6), which provides that a plan that benefits no highly compensated employees satisfies coverage requirements for the year.

[mbozek]

Non discrimination/coverage issues only arise if the plan discriminates in favor of HCEs, e.g, 5% owners and employees earning over 90k. There is no prohibition against providing differing levels of benefits among non HCEs under the IRC. All of the distinctions in benefits and coverage under IRS rules are predicated on the distinction between HCEs and non HCEs-- there are no standards for nonhce v. nonhce differences. However, the benefits cannot discriminate on account of age, sex or race under federal law. If the employees are covered by a collective bargaining agreements, the owner will have to negotiate the benefits with the unions representing the employees of each unionized facility.

[pjkoehler]

PES: "Plans benefitting no highly compensated employees" satisfy the minimum coverage requirements of Code Sec. 410(B). See Reg. Sec. 1.410(B)-2(B)(1) & (6). Accordingly, a plan that excludes employees of certain controlled group members should pass minimum coverage as long as no HCEs benefit. I suggest including a plan term that includes the HCEs as part of an excluded classification.