Controlled Group-Employed by 2 companies

[Guest Laura Millwood]

Situation: One employee is employed by two companies of a controlled group. One of the companies is a participating employer in the plan in 1998, the other does not become a participating employer until 1999. This employee meets the eligibility requirements to participate in 1998 under the company that is a participating employer. The other company is only three months old and the employee "technically" does not have the service under that company to participate. When will his compensation under this new company be able to be counted for deferral purposes? Does he have to meet the eligiblity requirements under that company before he can start deferring part of that salary or does his service under the other company carry over even though the company has only been in existence for 3 months? The payrolls of the companies are separate. Since controlled group rules state it is treated as one company I would think he is eligible to defer on both salaries now and does not have to fulfill any other eligibility requirement. Thanks for the help!

[Ervin Barham]

Check your plan document carefully. It should spell out the recognition of service with members of a controlled group. Does it recognize service between group members or transfers between companies?

The plan document will govern, but based on your comments, it appears that

the employee would be eligible to defer based on the salary of the participating company. Since the new company is not a participating employer, you have no basis for making a contribution by that employer. Thus, compensation with the new company would be counted once they become a participating employer.

I failed to mention previously that if the document is a standardized document, the new company may be covered anyway - check the plan document!

Yes they are treated as one employer for certain purposes, e.g., coverage testing, top heavy, etc., but would still have to follow the plan's terms as to who is eligible. You may have eligible employees who are not covered. If this employee deferred in 1998, you will have a lower ADP, since you would include total compensation for that purpose. The biggest issue is coverage.

This presents a tricky practical situation as you've described, so check plan document carefully.

There may be other viewpoints on this. I hope this helps.

[This message has been edited by Ervin Barham (edited 01-29-99).]