Two Planners conflicting information on Controlled Groups

[Guest Wesmon]

I need some guidance and I’m getting conflicting information from two different benefits companies. Possibly, I’m not explaining myself properly to them or I’m just not understanding properly (or they’re someone is trying to sell me something I don’t need!)

My partner (Joe) is 100% owner of two LLC’s, (call these entities A, B).

Both have less than 20 employees each, both are completely different businesses with no employee overlap.

Joe is also an W2 employee of entity X and fully participates in its 401k.

I (Wes) have a C-Corp with S election, (call this entity S) I’m 100% owner of, with no employees (besides me).

Joe and Wes are getting into a completely new business, an LLC, 50/50 owners, and 20 employees (call this entity N).

The conflicting information we are getting is generally centered around the entities being called controlled groups.

Joe and Wes are not related. None of the entities have customers in common nor derive revenue from each other.

Wes has had both a SIMPLE and a SEP (at different, exclusive times) in entity S.

Joe has a Safe Harbor 401k for the employees of A. Joe offers nothing in B.

1) One planner is telling us that Joe must offer the same plan in A and B since they are a controlled group.

2) Same planner is saying that N is formed, the same plan, any plan, must be offered in ALL the entities

3) What’s the truth, if there is black and white truth? (another planner is saying that the entities can have their own plans)

4) What kind of plans should be set up? Considering:

Joe would like to keep maxing out his 401k in X, because of a great employer match.

We will be scrapping the 401k in A since the employees no longer wish to participate.

We like to set up a plan in N for Joe and Wes (where few, if any employees want to participate – so if some sort of mandatory contribution is required, that’s ok).

Wes would like to keep some type of plan in S.

Thanks very much… I have a conference call next week with both planners so any guidance would be helpful.

[K2retire]

There is no question that A and B are a controlled group. That doesn't necessarily mean they both have to be in the same plan, so long as testing is satisfied.

Your best option is to consult an ERISA attorney. You have a very complicated situation and guessing wrong would be more costly than a consultation up front.

[Bird]

Caveat: I have some sort of mental block about controlled groups (and moreso about Affiliated Service Groups). I could be missing something...

...but, if we take your word for it that the companies get no revenue from each other nor share customers, then it's actually pretty easy. A and B are a Controlled Group, and while they don't have to offer the same plan, they have to be combined for testing purposes. S and N are unrelated and can do what they want.

(I get a little suspicious about everything being unrelated when someone has fingers in so many supposedly independent pies, and your statement that "we" will be scrapping the plan in A when you have no interest in A makes me wonder. The planner who is telling you that all companies have to offer the same plan may be making assumptions based on those kinds of impressions.)

It really needs to be evaluated carefully by someone with knowledge in this area and full details of your situation. But if you want to be cheap about it, start by challenging the planner who told you all companies have to offer the same plan - why?

[Guest Wesmon]

Perhaps I was getting consfused about having to offer the sample plan vs testing them as a group.

B is a bar/tavern. A is a retail medical distributor. N is a retail facility.... so I'd call that pretty different lines of business.

Thanks for your help.

[ETA Consulting LLC]

1) One planner is telling us that Joe must offer the same plan in A and B since they are a controlled group.

You, apparently have only 50% of your NHCEs benefiting from "A (which I presume is entity X)" while 100% of your HCEs benefit. This would seem to fail coverage. While the planner is "Technically Incorrect" he has a good point that you wouldn't have this issue if the plan were offered to both companies.

2) Same planner is saying that N is formed, the same plan, any plan, must be offered in ALL the entities

This is not true. There is no controlled group or affiliated service group. However, if this "Entity N" is formed merely to provide management services to (A, or B, or A&B), then you would be in an affiliated service group (Management Group).

3) What’s the truth, if there is black and white truth? (another planner is saying that the entities can have their own plans)

The planner who states each entity can have their own plans should be avoided. He has totally dropped the ball. While the other plan who states all entities should be in the same plan is incorrect, he is approaching your situation correctly. Before you establish a plan, you must identify the "Employer" with respect to the plan being established. This means you must perform the controlled group and affiliated service group analysis (which is what the planner was attempting to do, even though his analysis is a bit flawed).

4) What kind of plans should be set up? Considering:

Joe would like to keep maxing out his 401k in X, because of a great employer match.

We will be scrapping the 401k in A since the employees no longer wish to participate.

We like to set up a plan in N for Joe and Wes (where few, if any employees want to participate – so if some sort of mandatory contribution is required, that’s ok).

Wes would like to keep some type of plan in S.

After you vet 1, 2, & 3 above and get all the relevant facts correct, then you can tackle this.

Good Luck!

[Mike Preston]

The planner who states each entity can have their own plans should be avoided.

This is far too bold a statement. I can easily see census and benefits such that each entity can have their own plan.

You need an analysis from somebody who knows what they are doing.

[ETA Consulting LLC]

The planner who states each entity can have their own plans should be avoided.

This is far too bold a statement. I can easily see census and benefits such that each entity can have their own plan.

You need an analysis from somebody who knows what they are doing.

Pushing the "Really???" button

Obviously, had any professional on this board (or anyone of our caliber) been involved, the question would've never made it to this forum. Apparently, Wesmon is being told different things by two different advisors while neither one is taking the time to explain "how" they arrived at their conclusions. When you have two companies (each with 20 employees) being owned by one person, and the plan is established covering the owner and only one of those companies, my quick calculation was a 50% coverage ratio. We all know what is possible as you perform more elaborate levels of testing, but this quick analysis was the basis for my statement.

Good Luck!

[John Feldt ERPA CPC QPA]

Joe already has a 401(k) plan for A. What kind of plan document is being used? Let's suppose it's a standardized document (the type of document many of us avoid). If it is a standardized plan, then the employees of all of the entire controlled group and the affiliated service group are eligible for the plan (assuming any entry requirements were met).

That brings me back to K2retire's comment, "Your best option is to consult an ERISA attorney."

However, if a good TPA firm is contacted and they are given the census data, the ownership and company structure information, plus a copy of the plan documents and plan amendments, plus some time to discuss things with the business owners, they should be able to get the ball rolling along. Just make sure they are consulting for you, not merely trying to make a sale. And then it may become apparent at some point, that if they find a grey area in there that still needs counsel, they would advise you of that.

FWIW.

[Mike Preston]

The planner who states each entity can have their own plans should be avoided.

This is far too bold a statement. I can easily see census and benefits such that each entity can have their own plan.

You need an analysis from somebody who knows what they are doing.

Pushing the "Really???" button

Obviously, had any professional on this board (or anyone of our caliber) been involved, the question would've never made it to this forum. Apparently, Wesmon is being told different things by two different advisors while neither one is taking the time to explain "how" they arrived at their conclusions. When you have two companies (each with 20 employees) being owned by one person, and the plan is established covering the owner and only one of those companies, my quick calculation was a 50% coverage ratio. We all know what is possible as you perform more elaborate levels of testing, but this quick analysis was the basis for my statement.

Good Luck!

And quick analysis is just what Wes does not need. My lord, there are a number of separate businesses here. We don't know the HCE % of either entity you are talking about so we can't tell a damn thing about whether separate plans are viable. So that means to me, who are we to say they aren't?

There is just too much information needed to say one way or the other.

Unless I've seen the proposal or letter to the client saying what the basis is for the separate plan capability I think it is more than rash to rule it out.

I *can* tell the OP one thing, though, and that is the analysis he is looking to find should be something he's willing to pay for. Otherwise, the analysis is worth exactly what he pays for it.

[ETA Consulting LLC]

I *can* tell the OP one thing, though, and that is the analysis he is looking to find should be something he's willing to pay for. Otherwise, the analysis is worth exactly what he pays for it.

I don't think this analysis is worth "paying for"; as it is not that complicated. Instead, I would recommend the analysis as necessary for the Advisors to win the business. When there is discomfort to the owner resulting from receiving conflicting information (with no details on why certain answers are provided), then the incorrect approach has already been applied. Heck, I'd do it for free given a detailed census; it just isn't that complicated. Obviously, the quick 50% calculation would change as the number of HCEs change, but the math being applied is simple division.

Good Luck!

[K2retire]

I *can* tell the OP one thing, though, and that is the analysis he is looking to find should be something he's willing to pay for. Otherwise, the analysis is worth exactly what he pays for it.

I don't think this analysis is worth "paying for"; as it is not that complicated. Instead, I would recommend the analysis as necessary for the Advisors to win the business. When there is discomfort to the owner resulting from receiving conflicting information (with no details on why certain answers are provided), then the incorrect approach has already been applied. Heck, I'd do it for free given a detailed census; it just isn't that complicated. Obviously, the quick 50% calculation would change as the number of HCEs change, but the math being applied is simple division.

Good Luck!

Many reputable professionals can and would do that. The issue from the client's perspective is how to figure out the integrity and competence of the person doing the analysis. And given the conflicting information already received, how to make sure it is both accurate and appropriate to the situation.

[ETA Consulting LLC]

Many reputable professionals can and would do that. The issue from the client's perspective is how to figure out the integrity and competence of the person doing the analysis. And given the conflicting information already received, how to make sure it is both accurate and appropriate to the situation.

Pushing the "Like" button. That is the issue; I can respect that.

[Mike Preston]

And with 5 entities to consider, HCE determinations in A, B and N, along with Joe making 401(k) deferrals into X anybody who would agree to write an opinion as to an appropriate design has a LOT of time on their hands.

And if I've said it once I'll say it a thousand times: a plan can not be designed without having a census.

I also suspect that when clients say "controlled group issues" what we find out they mean is "controlled group, affiliated service group, divorce and family employee issues".

Looking at the messages from Wesmon we clearly see that there are no Affiliated Service Group issues with A (retail medical distributor), B (bar/tavern) and N (retail). Not so sure about S - it may very well be a management service organization that wraps N into 414(m) [probably not at the moment, but we don't know what the plans for the future are].

Maybe this could all be clarified on a 5 minute phone call with the "technical" person from each of the competing proposals. Maybe not.

Since the qualified status of the eventual plan hangs in the balance, Wesmon needs somebody he can trust to do it right, that's for sure.