Controlled Group problem

[cpc0506]

We have a potential new client with some issues that need to be resolved.

First, there are two companies that are owned by the same 4 individuals. Our conclusion: They are a controlled group.

There are presently two prototype plans. The plans have never been tested together.

The owners are paid by both companies, but only defer in one of the plans and the owners are the only ones deferring in that plan.

There are no other employees that work for that company (or that is what they initially indicated in their correspondence to us. We havefound out consequently, there are other employees who work for that company as well.)

There are both union and non-union employees in both companies. Both plans cover union employees.

It appears to us that the plans should have been tested together. And possibly the combined plan failed ADP Testing for the past three years. Also, if both plans are aggregated, there is a top heavy issue for the past 2 years.

I would like some guidance. What recommendations would you make regarding this situation. What can we do to fix this client?

[Tom Poje]

just because you have a controlled group does not mean that plans are aggregated for nondiscrim (or ADP) testing.

If you do indeed have a controlled group, then you have one employer and a bunch of employees working for 2 companies.

if you aggregate for coverage you aggreagte the ADP test.

but if you do not aggreagte for coverage , you can't aggregate for ADP testing.

so its perfectly fine if 2 seperate ADP tests awere run (as long as for coverage that the people from company B were treated as includable and not benefiting. these people would not show on the ADP test either)

you did not indicate what the ownership was. its possible a controlled group might or might not exist.

possibly plugging the ownership percentages in the spreadsheet will indicate if you have a controlled group. I think you have the possible brother-sister 5 or fewer owning at least x% blah blah blah controlled group to determine

[cpc0506]

just because you have a controlled group does not mean that plans are aggregated for nondiscrim (or ADP) testing.

If you do indeed have a controlled group, then you have one employer and a bunch of employees working for 2 companies.

if you aggregate for coverage you aggreagte the ADP test.

but if you do not aggreagte for coverage , you can't aggregate for ADP testing.

so its perfectly fine if 2 seperate ADP tests awere run (as long as for coverage that the people from company B were treated as includable and not benefiting. these people would not show on the ADP test either)

you did not indicate what the ownership was. its possible a controlled group might or might not exist.

possibly plugging the ownership percentages in the spreadsheet will indicate if you have a controlled group. I think you have the possible brother-sister 5 or fewer owning at least x% blah blah blah controlled group to determine

I definitely have a controlled group.

As for the aggregation issue, I believe I have to. The reason being is that I cannot pass the coverage test. Company A only pays wages to the 3 of the 4 owners and no one else. Company B pays wages to 2 of the 4 owners and other non-highly compensated employees. I don't believe I can pass coverage.

Kathy

[Locust]

Is the coverage of the union employees in the plans required by the collective bargaining agreement? If so, I believe the union employees can be disregarded in testing for coverage and in running the nondiscrimination tests. I think the plans also get a pass on top heavy for union employees in this situation.

If the plans have the same plan years, they can be permissively aggregated and tested for coverage and nondiscrimination together. You would aggregate the plans, and see what the results of the tests are. You'd also have to aggregate for top heavy if you permissively aggregate.

If the tests aren't met, you have to do some sort of correction. If you're outside the period for correction under the regular correction rules (such as distributions for excess contributions, or amendment for coverage), you might have to go through VCP. A VCP filed with the IRS might be more favorable for the company than a correction according to the regular rules; for example, you might convince the IRS to allow a reallocation of profit sharing contributions already allocated to highly compensated employees rather than making additional contributions to all of the nonhighly compensated employees.

If the plan years are not the same, it's more complicated. I've got a situation like that. I think we'll have to mash everything together and work out something that seems favorable to the nonghighly compensated employees - the top heavy contribution will somehow have to be made, and the 401(k) tests too - maybe reallocate contributions and fully vest them, and put in additional money to make it work - and hope the IRS will accept that. If you have any ideas on this situation, I'd appreciate them.

[Floridaattorney]

Posted 15 January 2010 - 06:50 PM

Is the coverage of the union employees in the plans required by the collective bargaining agreement? If so, I believe the union employees can be disregarded in testing for coverage and in running the nondiscrimination tests. I think the plans also get a pass on top heavy for union employees in this situation.

If the plans have the same plan years, they can be permissively aggregated and tested for coverage and nondiscrimination together. You would aggregate the plans, and see what the results of the tests are. You'd also have to aggregate for top heavy if you permissively aggregate.

If the tests aren't met, you have to do some sort of correction. If you're outside the period for correction under the regular correction rules (such as distributions for excess contributions, or amendment for coverage), you might have to go through VCP. A VCP filed with the IRS might be more favorable for the company than a correction according to the regular rules; for example, you might convince the IRS to allow a reallocation of profit sharing contributions already allocated to highly compensated employees rather than making additional contributions to all of the nonhighly compensated employees.

If the plan years are not the same, it's more complicated. I've got a situation like that. I think we'll have to mash everything together and work out something that seems favorable to the nonghighly compensated employees - the top heavy contribution will somehow have to be made, and the 401(k) tests too - maybe reallocate contributions and fully vest them, and put in additional money to make it work - and hope the IRS will accept that. If you have any ideas on this situation, I'd appreciate them.

Out of curiousity, how did this turn out? There a number of plans which have similar issues and, would be curious about your practical experience with this