Two Plans under same Employer

[cpc0506]

I have a client (takeover from another TPA) who has established two plans. One is for employees hired prior to 1/1/07 and the other for employees hired 1/1/07 or later. It appears this was done to avoid audit.

I have never seen this done. Is it okay? Both plans have the same provisions, even a new comparability profit sharing contribution. What has to be tested together?

Thanks for your help.

[ESOP Guy]

Kathy:

At a Sungard seminar a few years ago the person teaching the class suggest a similar strategy. It was a plan for everyone who last name started with the letter A-M and the other plan for N-Z for the same purpose avoid the audit.

I didn't look in to it very hard at the time. But as far as I could tell it seems to meet the letter of the law. I however understand your concern.

I will admit I don't want to give an opinion on testing. This is one of those topics I would want to research a good long time before telling anyone anything. Testing is too important to get wrong.

[12AX7]

I don't the answer either, but can offer this from an earlier posting:

From the 2000 ASPA conference:

Q5: 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?

A: 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 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.

[david rigby]

While the consequences are most significant when discussing the cost of an audit, there may be other issues. For example, there are at least two uses of "500 participants" that affect DB plans.

[PensionPro]

see discussion here esp post 9:

http://benefitslink.com/boards/index.php?showtopic=50202