Single Employer to Multiple Employer - Testing Implications

[kevind2010]

In January of 2010 ownership changes in what was once a controlled group of 2 employers participating in one plan such that the plan is now a multiple employer plan. For ADP/ACP testing, can we rely on the 410(b)(6)© transition period and still test the two companies together in 2010? If the plan uses prior year testing, once we do test them separately, I imagine we'll have to go back to the previous year and split out the NHCE's of the separate companies, correct?

And how about Top Heavy testing...does a transition period apply there as well or must we test each company separately immediately for 2010?

[QNPG]

In January of 2010 ownership changes in what was once a controlled group of 2 employers participating in one plan such that the plan is now a multiple employer plan. For ADP/ACP testing, can we rely on the 410(b)(6)© transition period and still test the two companies together in 2010? If the plan uses prior year testing, once we do test them separately, I imagine we'll have to go back to the previous year and split out the NHCE's of the separate companies, correct?

And how about Top Heavy testing...does a transition period apply there as well or must we test each company separately immediately for 2010?

Under Code Section 414(b), if a company is a member of a controlled group for any part of the year, it is a member of the controlled group for the year, so in my humble opinion, you would be required to test them together for 2010.

I do not think that Section 410(b)(6)© transitional period applies to the top heavy requirements.

From Chapter 11, part H of the ERISA Outline:

2. How to calculate the prior year ADP or ACP of the NHCs when there has been a plan coverage change in the testing year. If a plan coverage change occurs, and the plan is using the prior year testing method to perform the ADP test (or ACP test), the plan must determine how many prior year subgroups are to be represented in the prior year percentage that is used by the plan. If there are two or more prior year subgroups, the weighted average ADP (or the weighted average ACP) of those prior year subgroups is used as the ADP (or ACP) of the NHCs. See section VI.B. of Notice 98-1; Treas. Reg. §1.401(k)-2©(4)(i) and §1.401(m)-2©(4)(i) and section VI.B. of Notice 98-1.

2.a. Definition of a prior year subgroup. A prior year subgroup consists of all NHCs who, in the prior plan year, were eligible employees under a 401(k) arrangement (or 401(m) arrangement, in the case of the ACP test) maintained by the employer and who would have been eligible employees under the plan being tested if the plan coverage change had first been effective on the first day of that prior year. See section VI.D.2. of Notice 98-1; Treas. Reg. §1.401(k)-2©(4)(iii)(A) and §1.401(m)-2©(4)(iii)(A) and section VI.B. of Notice 98-1.

Company X maintains two 401(k) plans. Plan #1 covers its employees in Dallas. Plan #2 covers its employees in Kansas City. The two plans are merged. The resulting plan is Plan #1. This is a plan coverage change. For the plan year in which the merger occurs, the Dallas employees represent a prior year subgroup under Plan #1. They were eligible in the prior plan year (i.e., the 2004 plan year) for a plan maintained by the employer (i.e., Plan #1) and, had the merger occurred in that year instead, they still would have been eligible for the plan being tested (Plan #1). The Kansas employees represent a second prior year subgroup under Plan #1. They were eligible in the prior plan year for a plan maintained by the employer (i.e., Plan #2) and, had the merger occurred in that year instead, they still would have been eligible for the plan being tested (Plan #1). Since, in the Dallas employees and the Kansas City employees were covered by two different plans in the prior plan year, they represent two different subgroups. Therefore, if Plan #1 uses the prior year testing method for the plan year in which the merger occurs, the weighted average of the prior year ADP and ACP from both Plan #1 and Plan #2 will have to be taken into account. See the example in 2.b.2) below for an illustration of how the weighted averages are calculated.