Controlled group doesn't exist after all, but treated as one for several years

[katieinny]

It was thought that 2 businesses were a controlled group for many years. Therefore, for plan purposes they were treated as a single employer and operated under a single employer plan. Upon closer examination it was determined that they were not a controlled group after all. They adopted a multiple employer plan last year and began treating themselves as separate businesses under that plan. However, someone has asked if being treated as a controlled group caused a problem during all those earlier years. The question specifically relates to the allocations to participants, since the allocations were handled differently when they were being treated as a controlled group because the employees working for the smaller company benefitted by the larger contribution the bigger company made. Your thoughts would be greatly appreciated.

[QNPG]

Where a plan benefits employees of two or more employers that are not related within the meaning of IRC §414(b), © or (m), the plan is a multiple employer plan, and coverage and nondiscrimination testing must be performed on a disaggregated basis. See Treas. Reg. §1.410(b)-7©(4) (employees of each unrelated employer are “disaggregated populations” - see §1.410(b)-7©(4)(ii)©).

This also applies to ADP and ACP testing.

The following are the only things for which a multiple employer plan maybe treated as a single plan:

1. Eligibility. In IRC §413©(1), the plan must apply the minimum age and service requirements under §410(a) as if the employers are a single employer. For example, service with all the participating employers is counted in determining an employee’s eligibility to participate in the plan.

2. Exclusive benefit rule. In IRC §413©(2), the exclusive benefit rule is applied as if the employers are a single employer. This permits the allocation of contributions and forfeitures across company lines without violating the rule that an employer's contributions must be made for the benefit of its employees and former employees. The exclusive benefit rule is discussed in Chapter 3B (Section XII) of the ERISA outline.

3. Vesting. IRC §413©(3) treats the employers as a single employer for vesting purposes. For example, service with all the participating employers is counted in determining an employee's position on the vesting schedule. See Chapter 4 (Section IV, Part F) of the ERISA outline.

4. Section 415 limits. If a plan is maintained by more than one employer (i.e., a multiemployer plan or a multiple employer plan), benefits and contributions attributable to a participant from all of the employers maintaining the plan must be taken into account. See Treas. Reg. §1.415(a)-1(e). To apply the IRC §415 limits with respect to a participant, total compensation received by the participant from all of the employers maintaining the plan is taken into account, unless the plan specifies otherwise. See Chapter 5 (Section V, Part F) for more details. For example, in a multiple employer plan that is a defined contribution plan, the compensation from all the participating employers is aggregated to determine the participant's §415© limit and the annual additions in the plan with respect to all the participating employers are aggregated to determine if the limit is exceeded. If the employers had maintained separate plans this rule would not apply, and the section 415 limits would be separately determined for each employer because they are not part of a related group.

Hope this helps.

[katieinny]

If I understand the rules correctly, employers under a multiple employer plan are allowed to take the contributions made by both companies and allocate the total to ALL the employees, e.g., every employee gets a 5% contribution, even if one company contributed a greater percentage of the total contribution than the other company. Alternatively, they can treat each company individually by contributing to its own employees, e.g., Co. A contributes $100,000 and allocates 5% to its EEs and Co. B contributes $50,000 and allocates 3% to its EEs. If they go with the latter method, they have to run a benefits, rights and features test.

In this case, the ERs thought they were a controlled group. They spread the total contribution out to all the employees as an equal percentage, e.g., 5% to everybody even though one company made a larger contribution than the other. They also treated all employees the same for all provisions of the plan. So, it would seem to me that no harm was done. Initially, I was concerned that the EEs of the larger company got less than they should have because their company made a greater overall contribution which resulted in the EEs of the smaller company getting more than they would have gotten otherwise.

If my thinking is correct, there doesn't seem to be an operational error, but only a document error. The document should have reflected the multiple employer status, not a controlled group. Am I over simplifying this?

[PensionPro]

According to IRC §413©(6), each applicable limitation provided by section 404(a) shall be determined as if each employer were maintaining a separate plan. An employer may generally speaking not deduct contributions made on behalf of individuals who are not considered its common law employees.