Single Employer to Multiple Employer

[kevind2010]

Joe Smith Sr. previously owns 100% of company A which sponsors a 401(k) plan. Joe Smith Sr. starts a new company (company B) and simultaneously sells all of his stock ownership of company A to his son, Joe Smith, Jr. 8 employees of company A move over to company B with Joe Smith Sr. The employees that moved from company A to company B continued to contribute to company A's 401(k) plan (i.e., no new plan was established for company B). All of this occurred back starting January 1, 2009.

We have determined that company's A and B do not form a controlled group nor affiliated service group, which would make it a multiple employer arrangment. My concerns are:

1. If company B did not adopt company A's plan (even though company B owner was previously company A owner), are the employees that are now with company B but still contributing to the 401(k) plan sponsored by company A ineligible to do so? If so, how is that or can that be corrected from a documenst standpoint (i.e., retroactive amendment)?

2. Does the 410(b)(6)© transition period come into play at all here?

3. If it's possible to correct and keep this arrangement in place going forward, how is ADP/ACP testing handled for the first year?

Any insight is appreciated!

[Ron Snyder]

1. a) Yes, they are now ineligible to do so. Even though they are still participants with account balances, they are no longer employees of the employer which adopted the plan. Salary deferrals must come from compensation from the employer, and they have received none since the transfer.

b) The company will now need to consult their ERISA attorney for guidance with respect to this issue. I don't practice law over the internet, and this is tax advice subject to the requirements of Circular 230.

2. The answer is that they may or may not, depending on the remedy selected. That is why consulting with a specialist is necessary.

3. It is possible to convert the plan and trust to multiple-employer status. However, all testing will then need to be done: first, separately for each adopting employer, and then for the plan itself.