Multiple Changes in Controlled Group Membership

[Guest Grumpy456]

Company A (which employs about 95 people) sponsors a qualified retirement plan (the plan uses the calendar year as the plan year). On January 15, 2005, Company A acquired 100% of the stock of Company B (which employs about 35 people). Company B does not sponsor a qualified retirement plan. I know that Code Sec. 410(b)(6)© provides a coverage transition period for Company A's plan through 2006. On February 6, 2006, Company B acquired 100% of the stock of Company C (which employes about 150 people). Company C does not sponsor a qualified retirement plan. On April 13, 2006, Company B sells 100% of Company C to an unrelated entity. Does Company A's plan now get another extension under Code Sec. 410(b)(6)© through 2007? As I read Code Sec. 410(b)(6)©, Company A's plan gets an extension through 2007 if (1) it passes 410(b) on February 5, 2006 (the date immediately before the change--which it barely does) and (2) coverage under Company A's plan is not significantly changed during the transition period (other than by reason of the change).

Help!!!

[ERISAnut]

Yes, but only with respect to Company C. The transition period between A & B is set through the end of 2006. This does not change. When B purchased C, then another transition period through 2007 was initiated with respect to C. This does not impact A & B since there was not change in coverage with respect to those two companies. The transition period was set to expire at the end of 2006. That didn't change.

Try not to overread it. It'll drive you nutz.

[Belgarath]

One other caution: some plans are drafted such that for coverage and nondiscrimination, all employees of a CG/ASG are automatically considered unless you ELECT to exclude them under the 410(b)(6)© exclusion you mention. So if you have, for example, a 401(k) with immediate eligibility, you can get burned. IMHO, a better document option is where the exclusion is the default, and they are only covered if you elect to cover them. Less likely for a client to get whacked with an unexpected problem, since they never tell you about the merger until about a year after it happens!

[ERISAnut]

Good point, but that gets debatable. When two companies enter controlled group status by merger, the transition period treats them as if no merger has taken place. Hence, the entire purpose of the transition period is to prevent companies from getting burned because they are not considered "related members of a controlled group".

But, it does make sense to always consider these impacts prior to merging new companies. This is where an effective Board Resolution stating the intent with respect to the plans will come into play.

[Belgarath]

Sorry, but I'm not sure what you are saying when you maintain it is debatable. Are you maintaining that the exclusion under 410(b)(6)© overrides a specific document language requirement that says otherwise?

When the companies are, in fact, a CG/ASG, and the document specifically requires that they they be covered (absent a specific exclusion of such employees ELECTED in the adoption agreement) and provides the mathematical methodology to determine that coverage, I don't see a lot of leeway there. Would you feel comfortable ignoring the document language and instead rely on the exclusion available? (I grant you that it is very possible that an IRS reviewer wouldn't even check the document language where someone relied on the exclusion, but I wouldn't want to count on that myself.)

If the document were either silent or ambiguous on this issue, then yes, I'd feel comfortable relying on the statutory language. Whatcha think?