Avoid future audit?

[Jed Macy]

Does any one have any experience with a spin-off of about half the participants to a second plan?

Let me be clearer. Plan ABC has 150 participants and attaches CPA-audited financial statements to its Form 5500. In mid-2012, about 75 of the participants and their account balances are spun off to new Plan XYZ. For 2012, Plan XYZ would not have to attach CPA-audited financial statements to its Form 5500 although Plan ABC would. For 2013, neither plan would have 100 participants and thus no audit.

Does it matter why the spin-off occurred?

Could it be only to avoid any audit requirement for 2013?

Are there regs or court cases on point?

[ETA Consulting LLC]

It doesn't matter. After the spin off, each plan would continue to pass the necessary non-discrimination and reporting requirements. No big deal; even if the primary reason is to get each plan below the 100 participant count.

Good Luck!

[Tom Poje]

this is a debatable issue.

Q and As do not necessarily reflect an actual position of a particular govt entity, they may indeed only reflect an opinion of one or more of its members.

but the issue has been raised before with the following comments.

At the 2000 Annual American Society of Pension Professionals & Actuaries (ASPPA) Conference, this was asked as Question 5 for the Department of Labor (DOL) (not the IRS Q and A):

A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance—even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department of Labor stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process.

At the 2009 American Bar Association (ABA) Conference Q and A session, this was answered in the following manner:

Question 14: An employer has about 200 employees, and 160 of them are eligible for one of the employer’s two retirement plans. Except for a provision on which employees are eligible, the two retirement plans have identical provisions. Further, each plan provides that a participant directs investment among mutual funds of the same network. Each plan uses the same prototype document, and the two adoption agreements are identical except for the eligibility provision. The different eligibility provisions do not relate to different business lines or locations. Further, nothing in the terms of the eligibility provisions suggests any business purpose at all. Rather, all of the documents and other facts seem to suggest that the employer designed the two eligibility provisions so that each plan will have fewer than 100 participants. Under both plans, the employer is the administrator and the only named fiduciary.

Proposed

Answer 14: A fiduciary may not rely on a plan’s documents if doing so is inconsistent with ERISA. See ERISA § 404(a)(1)(D). In deciding whether ERISA requires a fiduciary not to rely on a plan’s documents, an administrator must act according to ERISA’s standard of care. ERISA § 404(a)(1)(B).

If a person acting “with the care, skill, prudence, and diligence” that ERISA requires would believe that the two plans really are one plan, the administrator must engage an independent qualified public accountant.

DoL

Answer 14: Under Title I of ERISA, employers have substantial discretion in designing the benefit plans they will offer to their employees, including decisions on whether to offer the benefits as a single plan or as separate plans. Whether an employer has established one or more than one ERISA plan depends on the facts and circumstances. In the staff’s view, in the absence of contrary annual reporting rule or requirement and assuming the structure of the arrangements is otherwise lawful (e.g., under the Internal Revenue Code), it would be reasonable for a fiduciary to look to the instruments governing the arrangement or arrangements to determine whether the benefits are being provided under separate plans and to treat the arrangement or arrangements for annual reporting purposes as separate plans to the extent the instruments establish them as separate plans and they are operated consistent with the terms of such instruments.

It should be noted that

splitting the plan into two would raise certain issues, such as, what happens when a partially vested employee terminates? Do his forfeitures remain in just the plan he is in or do they get allocated across the board to all employees? If allocated to all employees, it does not sound like two plans. If allocated just to one plan, and suppose that plan only had HCEs—then you have a discrimination issue.