Offering plan to corporation under common control

[Guest Buzzman]

My question is whether a company is required to offer the benefits of its 401k plan to the workers of separate company that is under common control. The factual scenario is as follows:

Corporation X (S corp.) is owned 100% by a husband and wife (51% H and 49% W) and has three employees (H, W and another individual). Corporation X has a 401k profit sharing plan and all three employees participate. Corporation Y (S corp.) is owned 100% by H and has ten leased workers but no employees. All management services for Corporation Y are provided pursuant to a management agreement with Corporation X.

Because Corporation Y is under common control with Corporation X, is Corporation X required to offer the same 401k plan to the leased workers or, alternatively, is Corporation Y required to offer the same 401k plan to the leased workers?

Any thoughts would be greatly appreciated.

[Guest Sieve]

Corp. X does not have to offer its 401(k) Plan to employees of Corp. Y. But, the leased employees of Corp Y are treated as employees of the controlled group, and minimum coverage testing (IRC Section 410(b)) must be performed taking into account all employees of the group. Based on what you've said so far, it's unlikely that the Plan would pass 410(b). Besides H & W, are any other employees HCEs ($100,000+ in 2007)? Do employees of Corp Y participate in any other qualified plan?

[Guest Buzzman]

Thanks for the response. I do not think any of the Y workers participate in other qualified plans. No other employees of X are HCE's but I will need to check and see if any of the Y workers meet the definition.

[Guest Sieve]

If there are no HCEs at Y among the leased & non-leased emlployees, then it looks like 100% of the controlled group's HCEs (H&W) participate in X's plan, and only 9% (1/11) of the group's NCHEs participate in that plan. And, there's no plan at Y to aggregate with X's plan for 410(b) testing purposes. So, X's plan fails 410(b). And, a leased employee safe harbor plan (a 100%, fully-vested, immediate participation money purchase pension plan through the leasing co.) cannot be used to exclude the leased employees from 410(b) testing because more than 20% of the group's employees (including leased employees) are leased. However, if these entities only recently became members of the same controlled group, then 410(b) is not an issue for one+ plan years if the plan remains unchanged during that time period.

[Guest Buzzman]

Thanks - this is very helpful. Corporation Y was not formed until March 2007. so a little over a year, with leased employee's beginning to work shortly thereafter. Corporation X's plan is on a calendar year.

[Guest Sieve]

The rule is that minimum coverage rules are not impacted by the new entity until after the end of the plan year following the plan year in which the controlled group came into existence (asusming the plan does not change in any substantive way during that period).

[jpod]

Unless someone has already done the analysis (and it's been done correctly), X needs to confer with an ERISA and/or tax lawyer to determine whether the people you describe as "leased employees" should really be treated either as (a) common law employees of Y, or (b) Section 414(n) leased employees of Y. If neither, there is no 410(b) coverage issue to worry about. If one or the other, I think the Company has a 410(b) problem now; I'm not so sure you get the benefit of the delay described by Sieve (see Treas. Reg. Section 1.410(b)-2(f)).

[Guest Buzzman]

Thanks Ipod - I waiting on the numbers right now, but believe some of the leased workers will be "leased employees" for purposes of 414(n), as they will probably have sufficient hours within a 12-month period ending March 2008 (Y corp formed in March 2007). You raise a good point about common law employees - however, Y corp's position is that they are not employees for tax purposes.

[rcline46]

To paraphrase Rhett Butler - Frankly, I don't give a hoot what corp Y thinks, do they have a written opinion from an ERISA atty that they are not employees? It will be very expensive to fix if they find out later that they are employees.

[Guest Buzzman]

Good point - thanks

[Guest Sieve]

jpod may well be right that the one plan year+ delay in Section 410(b) coverage I mention in an earlier post may not apply if this new entity (Y) was established and was a part of the controlled group right off the bat. It likely would only apply if the new entity (Y) was established by someone else & it became part of the controlled group through a FMV transaction (purchase of assets or stock). In any event, the leased employees (or common law employees) would not count for Section 410(b) purposes if there is a one y/s requirement in Plan X.

[Guest Buzzman]

Thanks Sieve - there is a one year eligibility requirement in the Corporation X plan - so does that mean they become eligible for the plan (and subject to being counted for Section 410(b) coverage - assuming not common law employees) one year after they become "leased employees" for purposes of 414(n)?

[Guest Sieve]

No. A leased employee's years of service for purposes of plan eligibility are measured from the commencement of service being provided to the employer, not from when the individual becomes a leased employee. (IRC Section 414(n)(4)(B).)

[Guest Buzzman]

Okay - thanks