Mid-year change creates multiple employer plan

[Guest Pennysaver]

Several other threads on this board raise this issue, but do not answer it: When related employers sponsor a single plan, and mid-year a transaction occurs such that the employers are no longer related, there are multiple employers sponsoring the plan. Assuming no issues with plan document provisions, eligibility, etc., my sole questions concern the date on which the plan will be treated as a multiple employer plan:

When exactly is the plan treated as a multiple employer plan? As of the date of the transaction? As of the first day of the plan year in which the transaction occurred? As of the first day of the plan year next following the date of the transaction? Is there any official guidance on this issue?

Thanks!

[ETA Consulting LLC]

Well, look at it like this. Everything happens on the date of transaction unless there is written relief to "deem" the transaction as not effective. We know that if two unrelated employers enter controlled group status for the first time, there is a transition rule under IRC Section 410(b)(6) that allows the companies to be treated as if they aren't related through the end of the year following the year of 'merger' (provided no amendments having certain impacts on coverage). Without this rule, they would be treated as related, with respect to non-discrimination, on the date they became related. When two related companies become unrelated, if you cannot find a rule that 'delays' the effect of being unrelated, then you would treat them as a multiple employer plan immediately (or spin an employer off into their own plan).

This is just the rule as I see it. I imagine your question is that two employers on a prototype document became un-related during the year and failed to separate them into separate prototypes; so how long do you have before losing reliance on the prototype's opinion letter? I'm just guessing this may be your situation. In this instance, I don't know, but would imagine you would have an 'as soon as administratively feasible' buffer to actually prepare the amendments. This become very subjective.

Good Luck!

[Guest Pennysaver]

We know that if two unrelated employers enter controlled group status for the first time, there is a transition rule under IRC Section 410(b)(6) that allows the companies to be treated as if they aren't related through the end of the year following the year of 'merger' (provided no amendments having certain impacts on coverage). Without this rule, they would be treated as related, with respect to non-discrimination, on the date they became related.

ERISAtoolkit, I do not believe that to be the case. The transition rule provided under Code Section 410(b)(6)© applies only to coverage testing; it does not provide relief from non-discrimination testing. So, even though coverage testing is deemed to be satisfied during the transition period, non-discrimination testing still must be performed. In your scenario, the employers still would need to perform their non-discrimination testing during the transition period, and would need to do so on a related employer basis, even though they are deemed to have satisfied coverage testing.

As far as my posted question is concerned about a related group becoming unrelated, there does not appear to be any clear guidance on the issue. The ERISA Outline Book discusses the issue of a related group becoming unrelated in the context of HCE determination, where three different approaches are proposed as potentially reasonable in the absence of IRS guidance (treat as related for the entire lookback year, treat as unrelated for the entire lookback year, or treat as related for only part of the lookback year.)

Is anyone aware of any official guidance on exactly when a plan would be treated as a multiple employer plan following a transaction in which a related group member becomes unrelated?

[ETA Consulting LLC]

ERISAtoolkit, I do not believe that to be the case. The transition rule provided under Code Section 410(b)(6)© applies only to coverage testing; it does not provide relief from non-discrimination testing. So, even though coverage testing is deemed to be satisfied during the transition period, non-discrimination testing still must be performed. In your scenario, the employers still would need to perform their non-discrimination testing during the transition period, and would need to do so on a related employer basis, even though they are deemed to have satisfied coverage testing.

410(b) is a non-discrimination test. So is ADP and ACP. When testing for ADP and ACP, there is a requirement that the population being tested satisfies Section 410(b). A plan that would otherwise fail 410(b) had it not been for the transition rule would not fail ADP/ACP due to testing a group that now fails 410(b).

Just so we remain on the same page, what non-discrimination tests are you referring to?

[Guest Pennysaver]

410(b) is a non-discrimination test. So is ADP and ACP. When testing for ADP and ACP, there is a requirement that the population being tested satisfies Section 410(b). A plan that would otherwise fail 410(b) had it not been for the transition rule would not fail ADP/ACP due to testing a group that now fails 410(b).

Just so we remain on the same page, what non-discrimination tests are you referring to?

It appears we are on the same page, but differ in terms of semantics. Code Section 410(b) imposes "minimum coverage requirements." "Coverage testing" refers to the testing required to demonstrate that a plan satisfies the minimum coverage requirements. Since Code Section 410(b)(6)© provides a special rule for treating the "requirements of this subsection" as having been met, the special rule applies only to the testing for minimum coverage requirements - i.e., coverage testing.

In contrast, Code Section 401(a)(4) refers to the requirement that the contributions or benefits provided under the plan not discriminate in favor of HCEs. Likewise, Code Section 401(k)(3) applies participation and discrimination standards, and Code Section 401(m) imposes a nondiscrimination test for matching and employee contributions. These are the nondiscrimination tests to which I was referring. While it is true that Code Section 401(k)(3)(A)(i) contains the requirement that the employees eligible to benefit satisfy the provisions of Code Section 410(b)(1), and that this portion of Code Section 401(k)(3)(A) would be deemed to be satisfied during the transition period by the special rule, that is only by virtue of the cross-reference within Code Section 401(k)(3)(A)(i) to Code Section 410(b); the true nondiscrimination portion of Code Section 401(k)(3) still would apply and the plan would need to be tested to show it is satisfied.

Thus, the transition rule applies only to coverage testing under Code Section 410(b), and not to the applicable nondiscrimination tests under Code Sections 401(a)(4), 401(k), and 401(m).

[ETA Consulting LLC]

Thus, the transition rule applies only to coverage testing under Code Section 410(b), and not to the applicable nondiscrimination tests under Code Sections 401(a)(4), 401(k), and 401(m).

I understand, but coverage is often a lead in to those tests. Even if we were to cross-test the plan under 401(a)(4), it is done by ensuring each rate group passes 410(b) on a cross-tested basis. Many non-discrimination tests begin with a population that passes coverage under 410(b). Making the transition rule apply to coverage would then allow each plan to be tested for (and pass) the non-discrimination requirements without regard to the other company. The only exception, then, would be a non-discrimination test that doesn't reference a population that satisfies 410(b).

Good Luck!

[Tom Poje]

unlike coverage (which has its own special transition rules -410(b)-6© and 1.410(b)-2(f)

as close as you come is 1.401(k)-5 and 1.401(m)-4 which simply says "reserved" for acquistions and similar events.

the fact that the special rule applying to coeverage does not apply to nondiscrim was seen as recently as rev ruling 2004-11

in particular (I have included the complete rev ruling, this portion in bold face, though I don't think it adds much more, but maybe you will find it useful.

Therefore, the special rule for certain acquisitions or dispositions in § 410(b)(6)© and § 1.410(b)-2(f) does not apply for purposes of satisfying the ADP test or the ACP test and thus provides no relief from satisfying these tests using the averages of the actual deferral ratios and actual contribution ratios, respectively, of the eligible employees under the plan. Accordingly, the cash or deferred arrangement and the matching contributions under the profit-sharing plan must satisfy the ADP test and the ACP test following the sale of S to Y using these ratios.

[ETA Consulting LLC]

unlike coverage (which has its own special transition rules -410(b)-6© and 1.410(b)-2(f)

as close as you come is 1.401(k)-5 and 1.401(m)-4 which simply says "reserved" for acquistions and similar events.

the fact that the special rule applying to coeverage does not apply to nondiscrim was seen as recently as rev ruling 2004-11

in particular (I have included the complete rev ruling, this portion in bold face, though I don't think it adds much more, but maybe you will find it useful.

Therefore, the special rule for certain acquisitions or dispositions in § 410(b)(6)© and § 1.410(b)-2(f) does not apply for purposes of satisfying the ADP test or the ACP test and thus provides no relief from satisfying these tests using the averages of the actual deferral ratios and actual contribution ratios, respectively, of the eligible employees under the plan. Accordingly, the cash or deferred arrangement and the matching contributions under the profit-sharing plan must satisfy the ADP test and the ACP test following the sale of S to Y using these ratios.

In order to keep things in perspective, you already have two plans of two different companies. When the companies become related, you have two plans for one company. You are still allowed to test each plan separately as each plan must qualify on it's own merits. However, they are 'permitted' to aggregate for those purposes.

I would like to know, in clear terms, when does the ADP test performed only on employees who are eligible to defer under that particular plan not allowed. When "MUST" you aggregate that employee population with employees in another plan of the employer. If it is not when the population in the plan fails 410(b), then when is it?

[Guest Pennysaver]

unlike coverage (which has its own special transition rules -410(b)-6© and 1.410(b)-2(f)

as close as you come is 1.401(k)-5 and 1.401(m)-4 which simply says "reserved" for acquistions and similar events.

the fact that the special rule applying to coeverage does not apply to nondiscrim was seen as recently as rev ruling 2004-11

in particular (I have included the complete rev ruling, this portion in bold face, though I don't think it adds much more, but maybe you will find it useful.

Therefore, the special rule for certain acquisitions or dispositions in § 410(b)(6)© and § 1.410(b)-2(f) does not apply for purposes of satisfying the ADP test or the ACP test and thus provides no relief from satisfying these tests using the averages of the actual deferral ratios and actual contribution ratios, respectively, of the eligible employees under the plan. Accordingly, the cash or deferred arrangement and the matching contributions under the profit-sharing plan must satisfy the ADP test and the ACP test following the sale of S to Y using these ratios.

Thanks, ERISAtoolkit and Tom.

Tom, I had already read Rev. Rul. 2004-11, but it does not address a multiple employer scenario arising from a transaction where a related group member becomes unrelated. If a plan sponsored by members of a controlled group passed coverage immediately before a transaction where one of the members of the controlled group becomes unrelated, and that unrelated member remains as a participating employer in the plan, you now have a multiple employer plan. It is eligible for the coverage testing relief under the transition rule, and I agree that the ADP and ACP testing must be performed post-transaction, but HOW exactly is the ADP and ACP testing performed post-transaction? Is the ADP testing performed on a disaggregated basis by each multiple employer, which would be what would normally occur in a multiple employer plan? Or would the ADP test be performed on an aggregated basis because that is how the plan is tested for coverage immediately before the transaction, since you must aggregate for non-discrimination testing if you aggregated for coverage testing, and the transition rule applies? This is the reason why I asked about guidance for exactly when a multiple employer plan is treated as a multiple employer plan.

[MoJo]

Thanks, ERISAtoolkit and Tom.

Tom, I had already read Rev. Rul. 2004-11, but it does not address a multiple employer scenario arising from a transaction where a related group member becomes unrelated. If a plan sponsored by members of a controlled group passed coverage immediately before a transaction where one of the members of the controlled group becomes unrelated, and that unrelated member remains as a participating employer in the plan, you now have a multiple employer plan. It is eligible for the coverage testing relief under the transition rule, and I agree that the ADP and ACP testing must be performed post-transaction, but HOW exactly is the ADP and ACP testing performed post-transaction? Is the ADP testing performed on a disaggregated basis by each multiple employer, which would be what would normally occur in a multiple employer plan? Or would the ADP test be performed on an aggregated basis because that is how the plan is tested for coverage immediately before the transaction, since you must aggregate for non-discrimination testing if you aggregated for coverage testing, and the transition rule applies? This is the reason why I asked about guidance for exactly when a multiple employer plan is treated as a multiple employer plan.

Pardon my jumping in here, and maybe I'm confused - but, once the corporate transaction occurred that caused the two entities to become unrelated, why is it you wouldn't simply treat this as two employers sponsoring two separate plans (from the date of the corporate transaction) albeit using a single document (not a bright idea, and one that should be resolved sooner rather than later)). Per recent guidance on multiple employer plans from the DOL (granted, not the IRS), that is exactly the situation you have - and absent some "transition relief" (and I can't see the logic in the IRS providing any such relief, as they had with the transition relief under 410(b)), as of the date of the transaction, there are separate testing requirements for each of the separate plans for each of the separate employers (taking into consideration only their separate workforce). Up until the date of the transaction, testing would be combined - as if a spin-off occurred on the date of the transaction, and the "spun off" entity would start a new plan year (as if it were a spin off).

Now the fact that they still use the same (commingled) trust to hold assets may be another problem, but I don't even see this as an issue.

Interesting discussion though on the interrelation between the transition relief under 410(b) and ADP/ACP testing issues.

[ETA Consulting LLC]

Is anyone aware of any official guidance on exactly when a plan would be treated as a multiple employer plan following a transaction in which a related group member becomes unrelated?

It would be "immediate" without any rule stating otherwise. It boils down to 'what is the rule when nothing is written'. In other words, what is the default position. Barring some language to the contrary, the plan will become a multiple employer plan immediately upon the two employers becoming unrelated provided both employers continue to participate in the plan.

I would wonder if you could retroactively spinnoff the employer into a separate plan as of the first day of the plan year of them becoming unrelated. If so, would the rule then be that as long as they passed coverage from the 1st day of the plan year of the split, they would be allowed to spin off and get tested separately for the entire year (each employer with their own plan)? Otherwise, we're left with approaching it exactly the way MoJo is suggesting. Just treat them as two separate companies as of the date of the transaction. While my questions are related to going back to the first day of the year, I just don't see anything that would create a 'delayed' effect of the multiple employer plan status.

Before attempting to read the rules, would this be consistent with what we are trying to ascertain?

[MoJo]

It would be "immediate" without any rule stating otherwise. It boils down to 'what is the rule when nothing is written'. In other words, what is the default position.

No "written" rule = no rule. Hence, the default is, unless there is a rule that allows aggregation, you don't. Two employers. Two plans. One document. One trust. The latter two don't affect how you test the plans. The former two do....

[ETA Consulting LLC]

No "written" rule = no rule. Hence, the default is, unless there is a rule that allows aggregation, you don't. Two employers. Two plans. One document. One trust. The latter two don't affect how you test the plans. The former two do....

I'm pushing the "Like" button!

[Guest Pennysaver]

Two employers. Two plans. One document. One trust. The latter two don't affect how you test the plans. The former two do....

Pretty sure a multiple employer plan would not be two plans. It is a single plan. Just saying.

Also, here there is a written rule - the special transition rule - it just is not clear how it applies to a multiple employer plan scenario. Thus, looking to the "default position" is not necessarily going to be the answer - hence my initial inquiry regarding whether there is any official guidance on this issue. It would appear that there isn't.

Thanks to all for their comments.

[MoJo]

Two employers. Two plans. One document. One trust. The latter two don't affect how you test the plans. The former two do....

Pretty sure a multiple employer plan would not be two plans. It is a single plan. Just saying.

Also, here there is a written rule - the special transition rule - it just is not clear how it applies to a multiple employer plan scenario. Thus, looking to the "default position" is not necessarily going to be the answer - hence my initial inquiry regarding whether there is any official guidance on this issue. It would appear that there isn't.

Thanks to all for their comments.

"Multiplpe employer plan" is a defined term in ERISA, and for it to be treated as a single plan, it must comply with what the DOL's interpretation of what a true MEP is. Recently they said what a MEP isn't - and when you have a situation where your MEP "isn't" - they have said each employer is the sponsor of it's own plan, requiring separate testing and Forms 5500. In my mind any, theis "isn't" a MEP as teh DOL sees it.

[rosskeene]

So, here it is a year later, and I have this same situation. Parent (P) is restructuring a current wholly owned subsidiary (S) into a 50% owned joint venture with an unrelated co-owner. The restructuring date (D day) will be in the middle of the 2013. S is currently a participating employer in P's calendar year 401(k) plan. S's employees will all continue to be employed by S after the restructuring. Payroll services, etc. will continue to be provided by P. P's plan will be amended to provide that as of the date of the restructuring it is a multiple employer plan, with S as an adopting unaffiliated employer.

How do we perform ADP/ACP testing for 2013? Are there two tests - P for all of 2013 (including S's employees prior to D day but excluding S's employees on and after D day, and S for its employees on and after D day through the end of 2013; or are there three tests - P + S for 2013 up to D day, P for the period from D day to the end of2013, and S for the period from D day to the end of 2013?

Any help would be appreciated.

[rosskeene]

Or maybe there are two tests - P for all of 2013 (including S's employees prior to D day but excluding S's employees on and after D day), and S for all of 2013 (including P's employees prior to D day but excluding P's employees on and after D day).

[HarleyBabe]

Wow, this is exactly what is going on with me right now and I posted under another topic but it hasn't been resolved and I need guidance quickly. Mid year, owner sold off one entity completely. Now I have two separate firms with the same plan and the same funding vehicle. I need to act now on how to handle. Spinoff? Multiple Employer? They are the same field, just different owners now. If I Spinoff, do I basically treat the employees as terminated the day of the transaction and roll their funds into a new funding vehicle and create their own plan? Do I amend the current doc stating the Spin Off and Employer A is no longer adopting this current plan. I need direction of the doc issue and investment vehicle issue. Would prefer two separate Plans and Docs. Any help quickly would be very much appreciated. Don't even have time to hire ERISA attorney for guidance. They did this and then told their TPA .

[rosskeene]

HarleyBabe, your situation seems easier. Just have the sold-off company cease participating in the old plan and adopt a new plan. If they truly aren't related anymore then there's no reason to maintain a multiple employer plan. Under Treas. Reg. Section 1.401(k)-1(d)(2), as long as you don't do a plan to plan transfer, the employees of the sold-off company can take distributions and roll them into the new plan if they want (or buy a boat). Easy to test since they are entirely separate plans.

My situation is tougher, because they companies will remain related (just not enough to be in the same controlled group) and for all other intents and purposes it will be business as usual.

I really want to know how everybody thinks you test after a mid-year conversion to a multiple employer plan.

[HarleyBabe]

my confusion is, how you code these distributions. Do I code them as terminated on the transaction date. And for document purpose, on the original document, I guess I just amend to remove the other firm as adopting the plan?

[rosskeene]

That sounds right to me. The regs say that for distribution purposes they have a severance from employment when they cease to be an employee of the employer maintaining the plan, which would be as of the date of the transaction. How you have to paper the withdrawal as a participating employer will depend on the terms of the Plan. Some plans would require an amendment, others might only require a resolution of the board of the sponsor, or a resolution of the board of the participating employer.

Can somebody please help me out with how to conduct ADP/ACP tests for a plan that becomes a MEP mid-year?

[K2retire]

You mentioned they are still related, just not enough to be a controlled group. Are they an affiliated service group?

[rosskeene]

No. It will be a multiple employer plan. Neither organization is a service organization, as defined in IRC 414(m)(3), and the principal business of neither organization is to provide management functions to the other. No ASG.

[rosskeene]

This can't be the first time a situation like this has come up. Anybody have even an opinion, whether it's backed up by any guidance or not?

[EBECatty]

Bumping this up as I'm running into the same situation now.

A mid-year reorganization will create several subsidiaries owned <80% by the plan sponsor (who is the current employer for all employees). No ASG. The subsidiaries will keep participating in the plan and it will become a MEP.

Any additional thoughts on ADP, top-heavy, etc. and everything else that is tested separately as a MEP?