Controlled Group

[Guest P Arpey]

We have a controlled group (company A and company B each have a money purchase pension plan and a profit sharing plan). They do not have the same plan year.

Should test controlled group as a single employer. However, since they do not have the same plan year, I can't permissively aggregate the 4 plans for 410(b) testing so that would mean I have to test company A's plans separately from company B's plans.

1. Is this correct?

The results of the testing: company A's plans failed the ratio percentage test and company B's plans passed.

Company A's plans would be disqualified unless they pass the average benefits test. (Note: there is no one to bring in to pass the test; HCE is the only participant and the remaining employees are union employees).

2. Is this correct?

Treas Reg 1.410(b)-7(3) does not require plans in the average benefit percentage testing group to have the same plan year. Since company A's plans are relying on the ABP test, all plans must be included in the ABP testing group.

3. Is this correct?

[Guest Sieve]

If this situation results from a merger/acquisition--which I would suspect that it does--remember the safe harbor period during which IRC Section 410(b) does not apply, which will give you time to restructure the retirement program, or change the plan years, in order subsequently to more easily pass 410(b). I assume that Co. A & B are not QSLOBs, because, if they are, you can test each plan separately from the other members of the controlled group--and Co. A plans might then pass 410(b) (seems like the only non-union emplyee of Co. A is an HCE, which is a free pass for Section 410(b) testing if you don't have to consider employees of Co. B).

Answers to your questions are yes, yes, and yes.

[Guest P Arpey]

Thank you for your reply. This situation does not result from a merger/acquisition. These are takeover plans and we are merging all plans into one plan, but in the meantime I am looking at prior years to see if this is a problem and what needs to be done about it. Do your answers remain the same?

[Guest Sieve]

Yes they do.

[ERISAnut]

There seems to be a missing link. 410(b) is calculated using all non-excludable employees of the controlled group of employers. So, while the HCE is the only non-excludable employee (since he is not union) of one company, there appear to be other non-excludable employees of the other employer within the controlled group. This would render a plan that benefits one HCE and zero NHCEs.

Appears to be a huge problem; a VCP one.

[Guest Sieve]

There's no missing link and it is a huge problem. That's why P Arpey wants to aggregate plans with different plan years to perform the average benefit test in order to pass 410(b)--and he/she must use the average benefits test since he/she cannot add anyone in order to pass ratio percentage in the plan that has only an HCE and no other non-union employees. If the aggregated plans pass 410(b) under the average benefits test, then there's the 401(a)(4) test to deal with. At least that's how I understood the issues.

[ERISAnut]

Well, you'll actually have to perform the NDCT and the Avg Benefits Test. Good luck on the NDCT with zero NHCEs. You may want to request Tom Poje take a look at this one. He's a CPC, that might mean something.

[Guest Sieve]

OK. So you're saying that these plans cannot pass the average benefits test of Treas. Reg. Section 1.410(b)-2(b)(3) because Co. A's plans do not pass one component of that test, the nondiscriminatory classification test (1.401(b)-4)--and that's because Co. A's plan apparently has no NHCEs and A's plans & B's plans cannot be aggregated for the NDCT because they have different plan years (1.401(b)-7(d)(5)). Is that right? Got that, P Arpey?

[Guest P Arpey]

Yes, you are 100% correct.

I have just started researching how to correct this problem. Under VCP, a 410(b) failure could be corrected through a retroactive plan amendment. That won't work here since there are no NHCEs to bring in to the plan.

Can this problem be corrected? If yes, how? If no, what needs to happen?

[buckaroo]

For Co. A's profit sharing plan, I would say that no contribution should be made. It appears that the HCE would not be benefitting so the coverage and non-dsicrimination testing would be moot. If there is a 401(k) component, then the entire amount would need to be refunded as a result of the failed adp/acp. As for Company A's MP plan, my initial thought with very little thought behind it would be to retro amend the plan to exclude HCEs going forward. This still allows the Union EE to get the contribution and removes any testing issue for the MP for the lone HCE. I am sure that this is a cutback, but I am not sure it matters much as the only person being adversely affected is the HCE. Sorry I can't be more help.

Bottom line: Get these merged ASAP.