When Controlled Group Ends as to Member...

[chris]

Individual A owned 100% of shares of Corp X which owned personal property, etc. used at several geographic business locations. Individual A has set up new corporations for each geographic location and each new corporation has purchased personal property used at its respective location. Individual A owns 66 2/3% of shares in each new corporation. Remaining shares of each new corporation are owned by key employee at each location. Key employee has option to buy all of individual A's shares within certain time period. Corp X maintains a profit sharing plan. CPA has been doing plan administration on basis of all being in a controlled group. I understand some (maybe all) of new corporations have signed participation agreements to participate in Corp X plan and have made contributions thereunder for respective employees. Individual A has asked CPA what happens if key employee of particluar location exercises option and buys all shares from individual A as far as controlled group issues go. Specifically, Individual A has asked when that happens will employees at respective location continue on same vesting schedule or will there be a distribution and a forfeiture? Or, will new corporation continue on as if nothing happened retirement plan-wise, i.e., no distributable event for participants of respective location, and new corporation now has a plan document that tracks the terms of an unrelated sponsor....? Individual A believes each new corporation should go out now and jump on a prototype at brokerage firm so that as key employees exercise options for shares each new corporation will still have its same bucket of plan assets/plan participants to deal with and there will be no separation issues. I have yet to review Corp X plan document, but from the controlled group perspective I do not see how having each new corporation set up its "own" plan now will necessarily change the controlled group issues. In other words, sit tight as-is and let each new corporation peel out of controlled group status as the stock options get exercised.

So, two questions: 1) what happens when respective entity ceases being in the controlled group if assets have been pooled with other participating employers? and 2) will having each new corporation set up own plan now ease the consequences when controlled group status ceases?

Thanks for your replies......

[ETA Consulting LLC]

Individual A owned 100% of shares of Corp X which owned personal property, etc. used at several geographic business locations. Individual A has set up new corporations for each geographic location and each new corporation has purchased personal property used at its respective location. Individual A owns 66 2/3% of shares in each new corporation. Remaining shares of each new corporation are owned by key employee at each location. Key employee has option to buy all of individual A's shares within certain time period. Corp X maintains a profit sharing plan. CPA has been doing plan administration on basis of all being in a controlled group.

Just thinking, if these are not controlled groups and the plans are written to a prototype document, then you have a multiple employer plan with no reliance on the document's opinion letter for starters.

I understand some (maybe all) of new corporations have signed participation agreements to participate in Corp X plan and have made contributions thereunder for respective employees. Individual A has asked CPA what happens if key employee of particluar location exercises option and buys all shares from individual A as far as controlled group issues go. Specifically, Individual A has asked when that happens will employees at respective location continue on same vesting schedule or will there be a distribution and a forfeiture? Or, will new corporation continue on as if nothing happened retirement plan-wise, i.e., no distributable event for participants of respective location, and new corporation now has a plan document that tracks the terms of an unrelated sponsor....?

Typically, the plan would be allowed to spin off into a separate plan (often done when a company is no longer a member of the controlled group; allowing the other related employers to remain on the prototype and have reliance on their opinion letter). If the document is set up as a multimple employer plan (e.g. volume submitter designated as such), then no further action would be necessary.

Individual A believes each new corporation should go out now and jump on a prototype at brokerage firm so that as key employees exercise options for shares each new corporation will still have its same bucket of plan assets/plan participants to deal with and there will be no separation issues. I have yet to review Corp X plan document, but from the controlled group perspective I do not see how having each new corporation set up its "own" plan now will necessarily change the controlled group issues. In other words, sit tight as-is and let each new corporation peel out of controlled group status as the stock options get exercised.

If they are in fact a controlled group, then you are correct; sit tight until they are no longer a controlled group (and then spin off).

It is this type of confusion in your fact pattern the prevents some of the 'heavy hitters' from responding. There "may" be potential issues here that need to be addressed prior to creating any detailed action plan.

Good Luck!