401(k) for 501(c)(3)'s with possible Controlled Group

[John Feldt ERPA CPC QPA]

A group of companies intend to adopt one 401(k) plan for all employees of all 4 organizations, A, B, C (nonprofits), and one LLC (partnership). The reason for the question is to obtain feedback regarding risk. The plan is intended to be established on a volume submitter document that allows for multiple-employer adoption. The issue is that we do not know if they are considered to be a controlled group (or possibly an affiliated service group). Even so, with the use of this type of document, what risks exist if the employers decide not to hire an ERISA attorney to help them with their determination.

Here is their situation: 501©(3) entity A and 501©(3) entity B are controlled by their own separate boards as follows:

Entity A's board is comprised of 2 appointed members plus 3 other members. According to their by-laws, the 2 appointed members are each appointed by their respective county board of supervisors (there are 2 counties). Thus each county's board gets to appoint one board member for entity A. The 3 other board members are determined by the existing (sitting) board (1 per year to serve a 3-year term). Removal of any board member is done when their term expires (3 years) or is done by a vote of the other members of the existing board. Entity A provides vocational (job) assistance.

Entity B is also a 501©(3) entity. About half of the clients of entity B choose to do business with entity A. According to the by-laws for Entity B, their 5 member board is determined under the same methodology as Entity A. These board members for B could end up being entirely different, partly the same, or entirely the same - they are not tied to each other by the by-laws. It just so happens that the same 5 people currently sit on the board of entity B who also sit on the board of entity A. Entity B provides in-home care.

Entity C is also a 501©(3) entity. The selection (control) of Entity C's board members is handled by the existing (sitting) board of entity C. Entity C is not related (by clients or otherwise) to entities A or B. The board members are also not related.

Entity C and Entity A together own an LLC (50/50 partnership). This LLC will primarily provide services for one county, one which does not currently have a service provider.

Are Entities A and B a controlled group? I’ve been reading 1.512(b)-1 (for non-stock organizations) and I am interpreting this to mean that determination hinges on how the board members themselves are controlled (appointed and removed). If that is correct, then only 2 are controlled by the same outside groups?

Would A and B possibly be an affiliated service group?

Would the LLC be considered part of a controlled group with Entities A or C? I find no way to insert the LLC (partnership) into the potential controlled group picture with the non-profit agencies – proposed reg 1.414©-5(b) applies only to two exempt entities – right?

[Bob R]

I'd suggest getting an opinion on this. I can't tell whether this is a CG or an ASG. But, there is no safe assumption that you can make. In order to perform coverage and nondiscrimination test (including the ADP test), you must know their status. If they are part of a CG or ASG, then they are combined for testing. If they aren't part of a CG or ASG, then testing is separate. So, if you make the wrong assumption regarding their status, then you have not performed the tests correctly.

[John Feldt ERPA CPC QPA]

For coverage, the intention is to cover all employees, so we think it will always pass coverage based on the numbers (we'll keep a careful eye on that).

For the design, we are considering safe harbor designs to eliminate the ADP/ACP testing.

If the safe harbor design is not adopted, then you are correct, we would run the risk that the tests appear to pass when they really failed or vice-versa. In that case, our conclusion was the same - go to the IRS to find out for certain if you are a CG or ASG.

Would anything else pose a problem if the Controlled Group / ASG determination is in limbo when the plan is established and/or administered - perhaps the 5500?