change in plan sponsor's business structure

[K2retire]

Sole proprietor establishes a safe harbor 401(k) plan in 2007 for which we are the TPA. While reviewing the 2008 Form 5500 the trustee calls us to say that we have used the wrong EIN on the form. After further questioning, it seems that the client became an LLC in February 2008, but never mentioned it to us until now. The LLC has never been added as a participating employer, but it issued all of the 2008 W-2s, including reporting salary deferrals. The LLC also made the SH match contribution.

This is a tiny plan with 4 participants (including the owner and his wife) and less than $10,000 in assets after almost 2 years. Any suggestions about a fix it that won't cost more than the plan is worth?

[J Simmons]

Sole proprietor establishes a safe harbor 401(k) plan in 2007 for which we are the TPA. While reviewing the 2008 Form 5500 the trustee calls us to say that we have used the wrong EIN on the form. After further questioning, it seems that the client became an LLC in February 2008, but never mentioned it to us until now. The LLC has never been added as a participating employer, but it issued all of the 2008 W-2s, including reporting salary deferrals. The LLC also made the SH match contribution.

This is a tiny plan with 4 participants (including the owner and his wife) and less than $10,000 in assets after almost 2 years. Any suggestions about a fix it that won't cost more than the plan is worth?

Does the plan document, per chance, specify that the 'employer' includes members of a controlled group including the sole proprietor? If so, and the sole proprietor owns 80% or more of the LLC, then the sole proprietor and the LLC are a controlled group, and both thus sponsoring employers.

[Guest Sieve]

Another approach . . .

If the LLC is the successor employer to the sole prop., then, under the terms of most plans, the LLC automatically becomes the plan's employer by operation. For example, the Corbel prototype Basic Plan Document says: "'Employer' means the entity specified in the Adoption Agreement, any successor which shall maintain this Plan and any predecessor which has maintained this Plan. In addition, unless the context means otherwise, the term "Employer" shall include any Participating Employer which shall adopt this Plan." (Emphasis added.) (Note however, that this definition would require members of the controlled group to specifically adopt the plan--but, standardized prototypes still, I believe, by their terms, must require that all employees of members of the controlled group be covered by the plan.)

In that case (a plan using a comparable definition as above), I think you'd need to amend the Form 5500 to include the proper EIN. If you want, you could (and probably should) amend the Plan to change the name of the employer and the name of the Plan.

[K2retire]

We are on the Corbel prototype. It does say that the employer includes related employers (LLC is owned 100% by the same person who was the sole prop.), but it also says that employees of related employers can only participate if the related employer adopts the plan as a participating employer. That is the step that they neglected.

It would be very helpful if a successor employer were automatically included, but I'm struggling with how the successor employer "shall maintain this Plan" without ever adopting it. Is making contribution deposit sufficient for that purpose?

[J Simmons]

"Maintain" is a more functional, less definite term than "adopt" which implies signing a document that specifies that the signing entity is becoming, for example, a Participating Employer. So if your version of the Corbel document has the verbiage that Larry quoted, then you might be able to take the position that as a successor employer, the LLC to the sole proprietorship, the LLC has performed the functions to 'maintain' the plan. At this point, you might want to draft a document to be signed that recites and memorializes when the maintenance of the plan actually shifted from the sole proprietorship to the LLC, i.e. when the LLC became the successor employer to the sole proprietorship. It sounds as if all the functions of maintaining have been so performed by the LLC since it succeeded the sole proprietorship as the employer.