Unexpected Member of Controlled Group

[Guest Tommy]

Four small businesses exist. Three have pension and profit sharing plans. Those three understand they are part of a controlled group. Over time, changes occur in the ownership of the fourth business. No one realizes that those changes bring that fourth business into the controlled group. The fourth business does not have a pension or profit sharing plan and cannot afford the same plan as the other three. It is now five years after the changes which made the fourth business a member of the controlled group. What can be done to cure the problem?

[david shipp]

The first step is to determine if there is a problem.

There is no requirement that the fourth company maintain a retirement plan (presumably the other plan(s) are not using a standardized prototype.) The issue is, rather, does the inclusion of the new company affect the demographics of the controlled group in such a way that the existing plan(s) no longer meet 410(B).

Assuming the plan(s) still meet coverage, taking the new company into account, all is well. Note that there a number of coverage testing alternatives.

[Guest Tommy]

Assume the 410(B) coverage tests are not met. The problem is the three companies with the plan are small while the fourth company is much larger and coverage for employees of the larger company is not affordable. How can the problem be corrected? If the existing plan is dropped, should the IRS be notified? How? Again, no one realized the changes in ownership in the fourth company brought it into the controlled group until many years later!

[Dave Baker]

I'd want to be very sure there wasn't a way to show that 410(B) can be met ... remember the ratio test isn't a straight "70% of all non-HCEs in the controlled group" but is something more like "the non-HCE covered percentage has to be 70% of the percentage of HCEs in the controlled group who are benefiting."