ASG and Safe Harbor 401(k)

[Guest JPIngold]

I've been reading through several posts dealing with this subject and keep confusing myself.

I have a new ASG that popped up in 2009. A doctor (who has a safe harbor 401(k) plan where he is the sole HCE and 4 NHCEs) purchased a 20% interest in an outpatient surgery center during the year. The surgery center has a standard 401(k) plan with 20 NHCEs and no HCEs. They do not match, but make discretionary profit-sharing contributions of between 3% and 4% of comp. each year.

The surgery center's plan would satisfy coverage on its own automatically since it has no HCEs.

The doctor's plan, though, is only covering 4 of the 24 combined NHCEs for a 16.67% ratio.

Therefore, I would need to aggregate the plans for coverage and nondiscrimination testing, meaning my safe harbor is blown because I can't aggregate safe harbor and non-safe harbor 401(k) plans. Does this mean I need to encourage the surgery center to adopt a safe harbor 401(k) plan or simply run a combined ADP test for the two entities or have I missed something???

Thanks.

James

[rcline46]

You have not described why you believe you have an ASG here.

[Guest JPIngold]

The physician owns 100% of his medical practice and now owns 20% of an outpatient surgery center. The surgery center is an FSO. The doctor's corporation is an A-Org as it is a service organization, it is deemed to own a 20% interest in the FSO (through the deemed ownership rules), and it is regularly associated with the FSO in providing medical services to third parties. Believe me, I would love to say that physicians owning interests in outpatient surgery centers are exempt from the ASG rules, but I just can't find a way, unless they can meet the deminimus exception. However, in this case, this doctor is probably generating 15 to 20% of the revenues of the surgery center. [Please correct me if I am wrong .... it would save a lot of headaches in my area.]

[rcline46]

That certainly smacks of an ASG! I think 401(k)(10) will buy you a year here (end of year following year of acquistion) because I think it applies to ASGs also (without looking it up again).

However you are (will be) certainly subject to the 410(b) test across the group. Changes will have to be made to the plans to get into compliance.

[Guest JPIngold]

So you agree with my methodology/math of the combined coverage test? Thanks so much for your input.

This is just such a trap for the unwary as these surgery centers pop up all over the country. I have been warning these doctors for several years of the dangers. Just imagine how many docs are using standardized prototypes out there and then get involved in a surgery center. Hmmm, should they now not be making contributions for all of the center's employees since the std. prototype is to cover ALL employees of affiliated entities?????

I really think the IRS should rethink their regs on ASG's. I can guarantee them that doctors are not investing in surgery centers to avoid making retirement plan contributions. They are investing to make an extra dime on their investment. The ASG rules should be on the books to avoid excluding employees who should be covered by the doctor (e.g. setting up separate entities for the employees, etc.)

OK - off my soap box now.

[rcline46]

Most documents since GUST exclude affiliated employers unless they adopt the plan - check your document carefully.

Even if excluded, it does not solve the 410(b) problem. Once you check 401(k)(10) on the merger and acquisition rules for timing of compliance (don't forget the other owners of the surgery group!), then you get to give the good news of the plan changes.

[Guest JPIngold]

Yes --- I use a volume submitter document for all of my plans, so I knew I was ok on those, but I guess I thought the standardized prototypes still contained the requirement that they cover all non-excludable employees of the employer and affiliates. Thanks for the insight. I'll check the documents if I happen to run into a prototype takeover.