Split Plan to Avoid 5500 Audit

[BeanCounterBlues]

ABC, Inc. maintains the ABC 401(k) Plan. Plan is approaching 120 eligibles. Sponsor has formed a new company (DEF, Inc.) for valid business purposes, one person owns 100% of both companies.

In order to avoid CPA audit of plan (it's a cost issue), sponsor wishes to install a 401(k) plan for DEF that is identical to the ABC plan. ABC has two HCE's and DEF has none. This is likely to always be the case. The ee's of DEF used to be ABC's ee's, the sponsor simply carved off a specific business unit into this newly formed company.

Plans will provide the match etc (will be identical). ABC however will exclude ee's of DEG from participation and vice versa.

Plans have no problems passing testing etc on aggregated basis as controlled group.

Any problem w/ this? Just seems potentially abusive to design in this regard solely to avoid CPA audit. The plans are clean, the sponsor just doesn't want to pay the CPA fee.

Thanks for any help.

[jpod]

ABC, Inc. maintains the ABC 401(k) Plan. Plan is approaching 120 eligibles. Sponsor has formed a new company (DEF, Inc.) for valid business purposes, one person owns 100% of both companies.

In order to avoid CPA audit of plan (it's a cost issue), sponsor wishes to install a 401(k) plan for DEF that is identical to the ABC plan. ABC has two HCE's and DEF has none. This is likely to always be the case. The ee's of DEF used to be ABC's ee's, the sponsor simply carved off a specific business unit into this newly formed company.

Plans will provide the match etc (will be identical). ABC however will exclude ee's of DEG from participation and vice versa.

Plans have no problems passing testing etc on aggregated basis as controlled group.

Any problem w/ this? Just seems potentially abusive to design in this regard solely to avoid CPA audit. The plans are clean, the sponsor just doesn't want to pay the CPA fee.

Thanks for any help.

[jpod]

No problem; done all the time.

Sorry about earlier post.

[Archimage]

The IRS may not allow because the only reason you are doing this is to avoid applicable reporting requirements.

From the 2000 ASPA conference:

Q5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

A: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.

[Locust]

There was a fairly extensive discussion of this earlier this year.

I think it depends upon whether the new plan is a separate plan, which I think (others disagreed) depends upon whether the plans have separate pools of assets. There are costs associated with a separate pool of assets - separate trustees, accounting, 2 5500s, separate Plan #s and EINs, etc.

Is the CPA's audit really so expensive? I know they've gotten more extensive and cover all sorts of things that I (again my opinion) do not think are necessary, but is it really that bad for a company that has more than 100 employees? Sometimes IMHO (Ha ha) clients are penny wise and pound foolish when it comes to professional expenses.

[BeanCounterBlues]

Thanks all for your thoughtful responses. To clarify, the intention is to establish a new investment contract ("pool") for the newly created DEF plan. Client is aware of asset levels influencing internal asset charges, duplicate fees (eg two 5500's instead of one), maintenance of two plan trust docs instead of one, etc etc.

The establishment of DEF, Inc. was completely unrelated to the possible establishment of a second plan. There was a business need to house a certain group of ee's in a separated company, although one individual does own 100% of both companies. It is just coincidence that this new company came into being around the same time it appears the ABC Plan will hit 120.

Due to the fact that there is a valid business reason for the existence of DEF and the plans will run entirely separately, albeit w/ identical provisions and permissive aggregation for testing, does the "valid business reason" perhaps mean it would be more likely the IRS would view we really do have two separate plans?

My fee to handle annual TPA work (recordkeeping lies w/ investment provider, I process compliance testing, 5500 trust doc etc) is far enough below the cost of the CPA audit that this idea is worth considering to the plan sponsor. If the plan wasn't clean I wouldn't even consider this option however this is a sponsor who always follows the letter of the law, my advice etc.

I realize respondent views are professional opinions as it sounds like this issue is open to IRS interpretation, but appreciate any further thoughts. Thank you again.

[Archimage]

I think the separate entities is a plus for the use of separate plans but having the same plan provisions in both plans would be a huge strike. From what you have written it sounds like the only reason they are doing this is to avoid the plan audit. I would advise your client about the potential risks and rewards and let them make the final decision.

[jpod]

You don't need a "valid business reason." You can avoid the audit requirement even if your sole purpose/motivation is to avoid the audit requirement. As long as you end up with two "separate plans" within the meaning of the 414(l) regulations, you'll be ok, notwithstanding any IRS or DOL huffing and puffing to the contrary. Now, whether it is actually worth it dollar-wise is a different issue, but you wouldn't be asking the question if you didn't think it at least might be worth it.