Controlled Group Actually Multiple Employer

[Christine Roberts]

Two related entities together sponsor a 401(k) plan under the belief that they are in a controlled group relationship.

The prototype document defines "Employer" to include controlled group/common controllled entities without separate plan adoption.

Entities turn out not to be in a controlled group or common control relationship. Plan is now 2 years old. Can they retroactively revise plan documentation to reflect the multiple employer relationship? Plan document permits related but non-controlled group entities to adopt plan as related employers.

[Guest Sabadee!]

I would think the document you're using will not be easily converted and you'll need an entirely new document to incorporate the needed provisions for a multiple employer plan. This is also a little too significant to go the self correction route without some residual risk. I don't think you would meet any resistance if you submitted this under a VCP, but just the same, you may consider going "John Doe". You might try posting this same question on the plan document board to see if any document gurus have already done this process.

[Ron Snyder]

You might not meet much resistance, but the downside risk is considerable. Your plan has violated the exclusive benefit rule of 401(a)(2) and the effect of such violation is plan disqualification!

Let's hope the IRS has the power and willingness to impose a lesser sanction, but it's going to be expensive if they do.

[Christine Roberts]

Yes the exclusive benefit rule violation is a concern; as it happens one avenue "out" may be that the two entities meet the requirements of a management function ASG. I believe a VCP application under such circumstances would be required to include a determination letter application re ASG status.

The plan also contains multiple employer language so retro amendment to reflect that status, combined with retro testing on a separate entity basis, is another option.

Thanks for offering comments/thoughts.

[Guest Sieve]

Hey, guys, violation of the exclusive benefit rule is not an issue with a multiple employer plan. Take a look at IRC Section 413©(2) and Treas. Reg. Section 1.413-2©.

So, the only problem I see is that the prototype document (as is required of all prototypes, I think, but not of volume submitters) simply does not permit unrelated employers to adopt the same plan. The consequence of doing so is that you cannot rely on the prototype's IRS approval letter, and therefore the plan simply becomes individually-designed. Is that fatal? Probably not. But if you are concerned, you could go in under VCP as a Plan Document Failure (claiming that the document, on its face, lacks appropriate language to comply with IRC Section 401(a)), and make the necessary revisions to the document so that it contains proper multiple employer plan language. (Of course, if there's an ASG here, as you suggest, then there is no document or reliance problem, either.)

[QDROphile]

Don't forget the securities law violations that occur in a mulitple employer 401(k) plan that is not registered.

[Guest Sieve]

What violations? Even if there's no publicly-traded employer stock in the Plan?