Controlled Group

[Just Me]

If a company is putting in a new 401(k) plan, and it owns a 100% owned subsidiary company at the beginning of the plan year that it will own less than 80% by the end of the plan year, are the subsidiary's employees counted in the minimum coverage test for that year?

[Guest renhark]

That's a good question, can't believe no one replied.

[JanetM]

Am thinking that this is covered under 410(b)(6)© - special testing rules.

IMHO if the sub has non excludables you will fail. Was the plan be drafted to exclude the employees of the sub?

[RTK]

I wonder if the testing methods of 1.410(b)-8 come into play.

[Guest abw]

Look at Code Section 410(b)(6)© which contains a transition rule if a company ceases to be a member of a controlled group. Should apply here and provide relief.

If, for some reason, you do not meet the requirements of 410(b)(6)©, look at Treasury Regulations 1.410(b)-8. Various testing options for minimum coverage. You can satisfy 410(b) if you meet the coverage requirements for each day in the year. You can also do quarterly testing. Finally, you can also do annual testing by taking into account all employees who were employees at any time during the year. If you did the latter, I would guess that you would pass.

Another thing to look at is Revenue Procedure 93-42 which provides for snapshot testing. Testing the plan for minimum coverage on one day, i.e., as of the last day of the year, looking only at employees on that date. You are not eligible for snapshot testing, however, if the day selected is not representative of the workforce for the entire year.