Controlled Group Document Issues

[Guest Midas]

I have two employers that each have a 401k with my firm. The owners of each company are husband and wife (wife owns one, husband owns the other), thus a controlled group. This relationship was not known originally and each company's plan was setup on a standardized plan document that does not (and would not be able to) exclude the other company within the control group from participation.

We are going to move each company to a non-standardized document that excludes the other employer from participating going forward.

What would be the proper correction for the time the company's were on the standardized documents? Mostly concerned about the documents not excluding the other employer from participating in plan.

I know the proper correction method for a single, non-control group plan that excludes an eligible employee. I just feel those correction methods don't make a lot of sense for a controlled group of plans. For a single non-control group plan, an improperly excluded employee was denied the opportunity to participate. For a controlled group of plans, though an employee was technically improperly excluded from participating in one plan, he/she was able to participate in another plan.

[wmyer]

Are you positive it's a control group? There is a spousal exception to the control group rules.

[Guest Midas]

Through the attributions rules applied to Brother-Sister Controlled Group determination they would be considered a controlled group.

[KJohnson]

wmyer is referring to the following:

(5) Spouse. (i) Except as provided in subdivision (ii) of this

subparagraph, an individual shall be considered to own the stock owned,

directly or indirectly, by or for his spouse, other than a spouse who is

legally separated from the individual under a decree of divorce, whether

interlocutory or final, or a decree of separate maintenance.

(ii) An individual shall not be considered to own stock in a

corporation owned, directly or indirectly, by or for his spouse on any

day of a taxable year of such corporation, provided that each of the

following conditions are satisfied with respect to such taxable year:

(a) Such individual does not, at any time during such taxable year,

own directly any stock in such corporation.

(b) Such individual is not a member of the board of directors or an

employee of such corporation and does not participate in the management

of such corporation at any time during such taxable year.

© Not more than 50 percent of such corporation's gross income for

such taxable year was derived from royalties, rents, dividends,

interest, and annuities.

(d) Such stock in such corporation is not, at any time during such

taxable year, subject to conditions which substantially restrict or

limit the spouse's right to dispose of such stock and which run in favor

of the individual or his children who have not attained the age of 21

years. The principles of paragraph (b)(2)(iii) of Sec. 1.1563-2 shall

apply in determining whether a condition is a condition described in the

preceding sentence.

I think your alternative if you can't get in under the inactive spouse rule is to try and go through VCP and convince the IRS that you never intended "dual coverage" under both plans. I think as part of this you would need to establishe that for each applicable year the plans could pass 410(b) and 401(a)(4) if they were separate plans tested on a controlled group basis.

[Guest Midas]

Is the key word corporation? These are not corps.

let's assume they are a control group, any thoughts on the question?