Coverage Testing in a Controlled Group

[Archimage]

I have a client that is a controlled group of companies. A new company will soon be added to the controlled group. Currently all companies are covered by one plan document with immediate entry. The plan is also cross-tested. They are wanting to exclude the new company from the plan. However, it looks like they may have a hard time passing 401(a)(4) non-discrim if they do so. I am thinking of suggesting they implement a year of service for plan entry just for the new company. Due to the expected turnover in this new company this would eliminate any testing issues.

I would appreciate any other comments or suggestions on plan design for this situation.

[Brian Gallagher]

Aren't people who have less than 1 yr of service already excludable from the coverage? Or am I confusing it with 410(b). (I really don't know much about 401(a)4 coverage).

[Archimage]

Yes, and I am taking that into consideration. For years after the initial year they would be in the plan and would work more than 500 hours but less than 1000 which would cause the problem.

[Blinky the 3-eyed Fish]

First, Brian, you can test otherwise excludable employee separately for coverage and nondiscrimination if you wish, but they aren't excluded from the tests per se.

Arch, how does turnover in the new company eliminate any testing issues? You could just test using otherwise excludables. Why do you think there will be testing issues by excluding the new company employees altogether? If you have statutory and non-statutory census counts I would be interested in these.

Also, does 410(b)(6)© buy you any time?

[Archimage]

No, this will not be a merger. It will actually be a brand new company.

If I allowed immediate entry then yes I could treat them as otherwise excludables for the first plan year. However, for any year after that I am going to have problems. If I add the one year wait, 1000 hours then they will never enter the plan.

[Blinky the 3-eyed Fish]

If I allowed immediate entry then yes I could treat them as otherwise excludables for the first plan year.  However, for any year after that I am going to have problems.  If I add the one year wait, 1000 hours then they will never enter the plan.

Isn't your otherwise excludable category only going to have NHCE's? If so, then there is no difference as far as coverage and nondiscrimination testing go whether you have a 1-year wait or whether you test the statutory employees separately. That's supposed to be the point of the rule.

[Archimage]

Yes, that is right for the first year. However, for the second year they will no longer be statutory excludable which is where my problem arises. If I allow them immediate entry and they completely exclude this company from the plan, this will affect coverage/nondiscrim for that second year. I am thinking if the company is not excluded and this company has the one year wait imposed onto it then none of the participants will ever enter the plan, hence I will not have any problems in any plan year after the first plan year.

[Blinky the 3-eyed Fish]

Huh? One of us is not understanding the other.

All I am saying that whether you have the one year wait for the new company or not doesn't matter as far as nondiscrimination/coverage testing goes as long as the otherwise excludable group doesn't have HCE's (a likely scenario). Do you not agree with this?

I am thinking if the company is not excluded and this company has the one year wait imposed onto it then none of the participants will ever enter the plan, hence I will not have any problems in any plan year after the first plan year.

I am not sure what you mean by this. The participants will enter the plan after 1 year. Also, the first year would be the year where coverage and nondiscrimination testing is not an issue at all because it's a new company. All the employees would either be not eligible if you put in the 1-year wait or in the otherwise excludable category if they were immediately eligible.

[Archimage]

Yes, I agree. Problems are not going to be in the first year this new company is formed.

The participants probably won't enter the plan because 95% of them will never work 1000 hours so that is why I want to add the one year wait just for the new company. All other companies would maintain immediate entry.

Hopefully that made a little more sense.