Overlapping Controlled Groups

[justatester]

Strange situation..

We have 3 Employers A, B, & C. The ownership structure is such that AB are members of a controlled group and BC are members of a 2nd controlled group within the plan. We looked in the ERSIA outline book and this does seem possible. However, it does not offer much guidance on how to complete the testing.

The attorney is suggesting running a two tests--one for each group. We have done that.

Group AB test fails adp/acp and coverage. Within that group, they have employers that do not make a match and/or profit sharing contibutions. It also fails ABT.

Group BC test fails adp/acp but passes coverage.

How do we go about correccting? For the overlapping employees with Employer B. Do we run the test with original precorrected numbers? ie: a participant needs to have a $1000 ROE due to a failed test for group AB. Do we reduce their contribution in the group BC test prior to running?

Any help/guidance would be greatly appreciated!

[Jim Chad]

Maybe it will help if you think of the two employer as AB= High CPA firm, Inc. and BC = Low Pension firm, Inc. And there are a few employees that work at each. Let's say that Mr. Bad Luck works for both and when you run the ADP for the High CPA firm. Inc. the test says he must take a refund of $500(Assume employer will not do QNECS). Then you run the test for the Low Pension firm, Inc. and the test fails here too. Let's say that Mr. Luck has to take out $400. This is already done, so he is all set.

Or let's say he has to take out $800. I believe you would distribute an additional $300. In other words I would count the $500 he was already paid.

I would not reduce prior to running second test. The money is part of last year's deferrals.

Everyone else, What do you think? Am I missing something?

[Kevin C]

Does the EOB mention overlapping group rules?

1563(b)(4) OVERLAPPING GROUPS. --If a corporation is a component member of more than one controlled group of corporations with respect to any taxable year, such corporation shall be treated as a component member of only one controlled group. The determination as to the group of which such corporation is a component member shall be made under regulations prescribed by the Secretary which are consistent with the purposes of this part.

There are some rules in 1.1563-1T©. I don't know if they are still current.

[Guest Sieve]

I'm not so sure about the component member provisions of IRC Section 1563(b)(4) applying to IRC Sections 414(b) or ©.

As indicated in IRC Section 414(b), you specifically look to IRC Section 1563 for 414(b) purposes, and the 414(b) regs therefore formulate those portions of Section 1563 which are pertinent & applicable. However, the regs under IRC Section 414(b) indicate that a controlled group is determined "whether or not such corporations are 'component members of a controlled group' within the meaning of section 1563(b)." (Treas. Reg. Section 1.414(b)-1(a).) Therefore, I think that IRC Section 1563(b), including (b)(4), only applies in the context of filing a consolidated return, but not in reference to the definition of controlled group for pension purposes.

On the other hand, you do not look to 1563 for 414© purposes, but to the IRC Section 414© regs. Those regs seem to indicate that each controlled group is treated separately and that one entity can be a member of different controlled groups. (See Treas. Reg. Section 1.414©-2(e), Ex. (4), where X and Z are members of 2 distinct controlled groups and there is no indication that those entities would be considered in only one of those groups.) And, I can find no comparable rule in the 414© regs to the "component members" rule of IRC Section 1563(b)(4).

[Jim Chad]

I was going with "Who's the Employer/" by Derrin Watson.

Q 8:43 say "The component member rules do not apply to qualified plans or other employee benefit plans referring to code section 414(b)"

By the way How do you make the symbol for section here? I am using firefox.

[Kevin C]

Sorry, I was looking in the wrong place. The last sentence of 1.414(b)-1(a) that Sieve cited says a corporation can be in more than one controlled group.

[justatester]

Ok...thanks for the feedback...based on the post, it seems that it is possible to have overlapping controlled groups.

For testing, it makes sense to treat them as "separate employers". That is what we were thinking. So, basically run each group separately. Process ROEs for the first group. For the second group, reduce the ROE amounts by the amount previously distributed from the first group.

Am I correct.