Controlled Group - Testing & Allocations

[Guest Chris May]

I am working on a profit sharing allocation and the ADP test. The owners comp is low due to one entity but there in a CG and there comp among all entities would be sufficient to pass. Their comp in just the one entity will cause the plan to fail ADP. Can they use all comps if the other entities are not participating employers?

Also, can the combined comp be used for allocation purposes.

[jaemmons]

IMO hours worked and compensation earned with all employers of a controlled group would be included for plan purposes regardless of whether or not they are a participating employer. Since the employer, by definition, is the controlled group, unless the plan somehow has language precluding recognition comp and hours of non participating employers (which you would need to test for discrimination under 414s), comp and hours count across the board.

[Blinky the 3-eyed Fish]

I don't agree. I know that hours must be considered for related employers for determining eligibility. I know that if 2 401(k) plans are maintained by related employers any HCE's that participated in both plans have their deferrals/match aggregated for the ADP/ACP testing regardless of whether or not the plans are permissively aggregated.

You don't count the compensation and hours otherwise for related employers that have not adopted the plan. (Note that in a standardized document, they would be considered to automatically adopt the plan.) That is the distinction of whether they adopted the plan or not.

Chris, you don't mention whether or not the other related employers have plans. You could always aggregate them for testing and then all the compensation and annual additions would be combined for testing.

[Guest Chris May]

They all have different plans. I'd like to allocate a contribution on the compensation of all entities. Is it your opinion that I can not do it?

[Blinky the 3-eyed Fish]

My opinion is that each plan's deferral or contribution allocation needs to be based on the person's compensation while working for the entity that sponsors the plan. If you want to use compensation from one of the other entities, you must have that entity adopt the plan. (Unfortunately, you will also bring in a whole lot of people you didn't want to.)

If each plan is able to pass coverage on it's own and you are not permissively aggregating them, then you will only do the testing for each plan based on the compensation, deferrals and allocations for that plan and that company.

If you choose to permissively aggregate the plans for coverage and testing, then you have one big test that includes all the compensation, deferrals and allocations from all the plans and companies that sponsor the plans.

[jaemmons]

Chris,

Compensation is counted from all members of the control group as they are treated as one employer, regardless of whether they participate in the same plan or not.

Nondiscrimination testing uses the plan's definition of IRC 414(s) compensation. Since IRC 414(B) applies to IRC 415©(3) which is the starting point for determining 414(s) compensation, you must count all compensation paid to all members of the controlled group, as if they were one employer, in order to ensure that the plan's definition of comp does not discriminate in favor of the HCE's.

IRC 414(B) : ...For purposes of section 401, 408(k), 408(p), 410, 411, 415 and 416, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)©) shall be treated as employed by a single employer.

Just because a member of the control group does not participate does not mean that you do not count the comp earned from their employ. I am sure there are plans which do so, but this would be a non safe harbor definition of comp which would require nondiscrmination testing.

[Guest Chris May]

That's what I thought. And I am also figuring hours across companies are consolidated for vesting and accrual requirements.

Thank you

[jaemmons]

yes they are. If they are not, you would violate IRC 410(a) as the plan would be imposing an hours requirement greater than 1,000 (assuming the plan requires 1000 hours for eligibility, vesting and/or allocations).

[Blinky the 3-eyed Fish]

OK, I must have taken too much crack this morning. Tomorrow I will try Wheaties. I agree with jaemmons. The only thing I hold to is that the allocation of the contributions from the plans will not consider compensation from the other employers. For example, if the profit sharing contribution is 10% of compensation for plan A and 5% for plan B, the contribution for plan A will only be based on compensation earned while employed for the sponsor of plan A, and the same for plan B for comp earned while with the sponsor of plan B.

[jaemmons]

Blinky,

IRC 414(s) compensation is defined. Any alternative definition of comp must satsify 414(s)(3). I agree that the plan can allocate benefits based upon compensation earned for the member sponsoring the plan, but the plan has to satisfy the "de minimis" test under Treas Reg 1.414(s)-1(d)(3). The control group is the employer for all plan purposes, so to exclude comp earned from a nonparticipating member would be an alternative definition of comp which must be tested for nondiscrimination.

[Blinky the 3-eyed Fish]

I agree again.

[RTK]

Let me understand this in the context of a client with 72 pension and profit sharing plans in the US and a worldwide controlled group of 60 companies.

Each db plan has a compensation based formula and requires 1,000 hours to accrue a benefit. Each dc plan has a compensation based contribution or allocation formula that requires 1,000 hours for a contribution or allocation, along with a 401(k) feature.

Are you saying that each db and dc plan must be tested for a 414(s) nondiscriminatory alternative definition of compensation unless each plan recognizes all controlled group compensation and employment for benefit accrual and contribution purposes?