affiliated service group - esop and non-esop

[Guest mk2308]

It has been determined through an attorney we have an affiliated service group consisting of 2 clients. The one client has a 401(k) Leveraged ESOP plan and the other a 401(k) Profit Sharing Plan. The 401(k) Profit Sharing plan excludes HCEs. Our understanding is the Profit Sharing Plan will provide a PS contribution "comparable" (we assume in dollar amounts) to the Leveraged ESOP. I understand we have to aggregate the plans for testing purposes, but is there a Benefits, Rights, and Feature problem with this plan design?

[Guest mk2308]

Could someone please respond to this?

[BeckyMiller]

Remember, an ESOP cannot be combined with a non-ESOP for discrimination testing. See IRC Reg. 54.4975-11(e). You get no cross testing under §1.401(a)(4)-8(b).

I know there have been some changes in the aggregation rules on ESOPs that I just haven't looked at recently. So, let's pretend that you can aggregated these 2 plans. I think you still have a problem. There are some old published rulings - around 1970, 71 or 72. That discussed situations where the right to employer securities was limited to a discriminatory group. The conclusion was that this was prohibited discrimination. Now, these are obviously really old. But, it is a concept that I suspect that the service would be inclined to sustain - anything to limit those nasty ESOPs....

You are caught in a quandry however. If it is an affiliated service group, the securities of the ESOP company likely wouldn't be "qualifying employer securities" with respect to the participants in the affiliate. Thus, you couldn't have an identical plan, couldn't use leverage, wouldn't get the same tax advantages, etc. That fact pattern might get you some relief.

My advice - check my first concern first. I don't think you can aggregate these plans for nondiscrimination testing. If I am correct, you are going to have to figure out some way to get the ESOP to work on its own.

Since your client has legal counsel, they need to look at this issue, too.