Credit for prior service within controlled group

[Cynchbeast]

BACKGROUND:

We have a client (Co. A) with a 401(k) . A few years after the plan originated, Co. A purchased part ownership of another company (Co. B). Both are restaurants. Ownership interests in Co. B have changed several times in the past few years, but at all times prior to 2012, Co. A owned no more than 40% of Co. B so there was not a controlled group.

Effective 01/01/12, Co. A bought out other owners and became sole owner of Co. B, so effective January, 2012 we are dealing with a controlled group; however the employees continued on Co. B's payroll through April, 2012. Co. B never adopted Co. A's plan and although we haven't finished final testing for 2012, for argument's sake, let's assume the plan passes 410(b) even with everyone form Co. B excluded.

Co. B was then dissolved and all employees transferred to Co. A. effective 04/01/12 with a hire date of 04/01/12

QUESTIONS RE 401(k) PLAN:

1) Does Co. A have to give former Co. B employees eligibility credit for past service or can they consider them all hired on 04/01/12?

2) Does the answer to 1) above change if the employer instead recognized Co. B employees' original hire dates and seniority for other benefits?

3) If we have to give credit for prior service, some of the former Co. B employees would have entered the plan in 2012, but were never offered the opportunity to defer (since Co. A treated hire date as 04/01/12). How do we resolve this? (it's a large plan and many don't defer; although both HCE & NHCE ADP rates are less than 1%, some individual rates are as high as 10%)

[Belgarath]

On the service crediting, this is a difficult topic, and I've discussed this with several of the "big name" ERISA attorneys in this business over the years, and even they do not have universal agreement.

Here's my own take, FWIW:

DOL regulation 2530.210(d) 

(d) Controlled groups of corporations. (1) With respect to a plan 

maintained by one or more members of a controlled group of corporations

(within the meaning of section 1563(a) of the Code, determined without

regard to sections 1563(a)(4) and (e)(3)©, all employees of such

corporations shall be treated as employed by a single employer.

(2) Accordingly, except as referred to in paragraph (a)(1) and

provided in paragraph (f) of this section, in determining an employee's service for

eligibility to participate and vesting purposes, all service with any

employer which is a member of the controlled group of corporations shall

be taken into account.

Except as referred to in paragraph (a)(2) and

provided in paragraph (f) of this section, in determining a

participant's service for benefit accrual purposes, all service during

periods of participation covered under the plan with any employer which

is a member of the controlled group of corporations shall be taken into

account.

It seems to me that the regulations do not exclude service credited before a company became part of a controlled group. The “exceptions” in (a)(1) and (a)(2) don’t seem to override the basic premise of (d). Granted that Treasury regulation 1.411(a)-(b)(3)(iv)(B) is not as clear on this issue for vesting purposes, the first sentence is ambiguous enough that it would seem consistent to interpret it in conjunction with the paragraph (d) of the DOL regulation, which DOES seem clear, at least to me.

Beyond that, what about IRC 410(b)(6)© - do you think this helps you out for 2012 (and 2013?)

[QDROphile]

"It seems to me that the regulations do not exclude service credited before a company became part of a controlled group."

The regulations do not exclude service credited before a company becomes part of a controlled group, but they do not include such service either. Since there is no rule that service before becoming an employee of the controlled group is to be counted (see section 401(a)(4) regulations that allow award of prior service credit if the award meets certain conditions), the regulations are simply establishing that all service as an employee in a controlled group, even in an ineligible position, count as service. Co. B employeees did not become employees of the Co. A until January 2012. That is when serivce starts for Co. B employees unless the employer chooses to award prior service credit and the conditions fit section 401(a)(4) regulations (which they should). Co. B employees have 3 months of service as of 4/1/2012 -- or a hire date of 1/1/2012, if you will. That does not mean that they cannot be excluded from the Co. A plan either before or after 4/1/2012.

This view of controlled groups is exactly the same as the view that lets us terminate 401(k) plan before acquistions and not have the buyer's 401(k) plan be a replacement plan.

[Belgarath]

See what I mean? So you take whatever approach you or your attorney feel comfortable with, and run with it. Believe me, I can (and have, when it suited my purposes) use QDROphile's approach.

"Go not to the Elves for counsel, for they will say both no and yes."

[Tom Poje]

"Go not to the Elves for counsel, for they will say both no and yes."

so actuaries will say as well, but they are only a poor imitation of elves.

[KJohnson]

Derrin's book says you have to credit and that despite other practitioners belief he thinks this requirement is "clear."

[Kevin C]

Did company B have a plan? Our document provider takes the position that a transfer of assets from another plan means the employer is maintaining the plan of a successor employer and service with that precessor employer counts. That goes with

1.411(a)-5(b)(3)(vi)Certain employers.—

For purposes of this subparagraph—

(A)Predecessor employers.—

Service with a predecessor employer who maintained the plan of the current employer is treated as service with such current employer (see section 414(a)(1) and the regulations thereunder), and certain service with a predecessor employer who did not maintain the plan of the current employer is treated as service with the current employer (see section 414(a)(2) and the regulations thereunder).

[Cynchbeast]

Thank you all for the responses. A few notes: this was not an asset purchase but a stock purchase. Co. A became sole owner of Co. B, then later dissolved Co. B and moved all employees over to payroll of Co. A.

So we have a controlled group as of 01/01/12, at which point we will take the safest position that we then recognize all service of Co. B's employees from date of hire. This brings a lot of people into the plan in 2012 who never had a chance to defer so, aside from paying a QNEC for lost opportunity, we won't pass 410(b).

HOWEVER; we have 7 HCEs only 1 of whom deferred. I think we can resolve this if we EXCLUDE employees from Co. B and also one or more HCEs. That way, plan should pass 410(b) and ADP and there will be no error to correct. This would require a retro-active amendment to 01/01/12.

Does this sound feasible?

[Tom Poje]

I'd be a bit wary, that sounds like a cutback of someone's benefit, even if it is an HCE

[austin3515]

Bump up this old one...  So would at least be a safe to statement to say that disregarding service in this scenario would be "very aggressive."  So for example, if there was ever going to be a regulatory review of this, the only exposure would be if you did NOT recognize service when they conclude you snhould have.

And honestly, I read the regs and I just do not see any room for interpretation on this point.  " all employees of such corporations shall be treated as employed by a single employer."  Same language in the IRS reg.  There are NO limitations entered.  Someone before mentioned the reg does not indicate that you must recognize pre-relationship service, but because there are no limitations on that very broad statement it definitely feels like you'd be adding language that just isn't there.  i.e., "all employees of such corporations shall be treated as employed by a single employer EXCEPT that service before the affiliation existed can be disregarded."  You have to impute that language to reach the conclusion I think.