Controlled Groups

[Guest Erin W]

I have a client who is part of a series of native corporations. The parent corporation (Corp A) started a 401(k) plan and all other corporations required to be included per the controlled group rules adopted the plan. A smaller company (Corp B, also part of the native corporation) is owned 30% by Corp A so is not required to be included in nondiscrimination testing but it adopted the plan as a participating employer. The plan is a Safe Harbor 401(k). Corp B now wants to "unadopt" the plan and start its own plan (using different eligibility requirements). How would this work? All the employees of Corp B got the SH notice so I think they should at least have to finish off this year and start a new plan effective January 1, 2012. Is it really that "easy" (or, rather, straightforward)?

[ETA Consulting LLC]

Erin,

There are issues that likely go beyond the question you are asking. You appear several steps into a process that appears inconsistent with the fact pattern you presented. Let me explain:

Rule 1) Each employer is either a member of the controlled group (or affiliated service group) or not. If so, then they are treated as a single employer for nondiscrimination purposes. In this case, you are stating that at least one company (Corp B) is not.

Rule 2) If more than one employer (who is not related by controlled or affiliated service group) adopts a plan, then that plan would not be treated as a single employer plan, but instead a multiple employer. One thing we know about multiple employer plans is that they cannot be written to prototype adoption agreements. Based on your comments, they were hopefully written to a volume submitter or some type of individually designed plan.

Rule 3) Plans must follow their written terms. If you don't like the terms, then amend the plan (remember that amendment timing issues must be addressed to ensure you do not violate any cutback or notification issues). So, you are thinking correctly with your questions regarding the timing, but they employer should draft an elaborate flow chart of exactly what they have and compare it to what they want. From there, your question, and many others that will be like it in some form or another, could be addressed in one sitting.

If nothing else, I would (at least) continue operating under the current written provisions for the remainder of the year as Corp B gets spun off into a separate plan. That would appear to be a reasonable start.

Good luck!