Controlled group plan splitting to avoid audit

[Belgarath]

The following has been proposed:

Corporation A and Corporation B are both owned by Mr. Big. Corporation A sponsors a non-safe harbor 401(k) plan, and Corporation B, as a member of the controlled group, participates. Calendar plan and fiscal years.

Now they have just gone over 120 participants, so Corporation B wants to spin off and have their own plan, effective July 1, so both plans can avoid audit. The new corporation B plan will be identical in every respect to the Corporation A plan, other than having a different census, so as long as both have the same plan year, I don't see any issues with permissively aggregating for coverage/nondiscrimination.

Am I missing something? Some trap for the unwary? Anytime something seems relatively straightforward, then when I start to worry...

Thanks.

P.S. In such a spinoff, would you have the Plan # be 001 or 002?

[david rigby]

You might benefit from reading similar prior discussions. Here are two (there may be more):

http://benefitslink.com/boards/index.php/topic/50722-avoid-future-audit/?hl=split#entry218964

http://benefitslink.com/boards/index.php/topic/50202-plan-audit/?hl=split#entry216745

[Belgarath]

Thanks.

I think it is pretty hard to call it "evasion" or whatever if you have two actual separate corporations, (albeit in a controlled group) who each sponsor their own plan. In the absence of a DOL regulation prohibiting it, which I haven't found, it seems like a reasonable position.

It wouldn't surprise me if the DOL, at some point, comes up with a regulation prohibiting this, but in the meantime...

[jpod]

I agree with your analysis about the risk. Also, I don't know how B's plan could be anything other than 001 (i.e., the first pension plan associated with the EIN assigned to B).

[ESOP Guy]

I am assuming their plan year is such that you didn't have the 120 on the first day of the plan year.

At risk of pointing out the obvious but the date you look at is the 1st day of the plan year not the end of the plan year to determine if you need an audit.

[Belgarath]

Your assumption is correct - they did not have 120 participants as of the first day of the plan year.

Thanks - 001 made the most sense to me as well, as they weren't actually the "sponsor" of the prior plan, but merely a participating employer.

[Flyboyjohn]

For those concerned about taking proactive steps to avoid falling into plan audit how about this argument:

Plan audit fees are a plan expense that can be allocated to participants (say $100/each).

Plan fiduciaries have a duty to minimize plan expenses.

Therefore it would be a fiduciary violation to not explore all legal avenues to avoid incurring the expense.

[shERPA]

Might work John, needs to be balanced by additional admin fees (usually less than the audit) and possible additional asset fees if the two plans separately fall below a breakpoint that they might if it were a single plan/contract.

[QDROphile]

Plan structure is not a fiduciary function. Assuming that the "minimize expenses" theory is legitimate (I think there are some matters to discuss), the best the fidiciaries can do is to recommend an amendment to the plan sponsor. One of the matters to discuss is how it looks for a fiduciary to be scheming to avoid an audit -- which one might presume is a legal requirement designed for the protection of participants. Perhpas it is better to let the plan sponsor make decisions aobut the plan structure without the advice of the fiduciaries for avoidance of the audit.

[Gadgetfreak]

Might work John, needs to be balanced by additional admin fees (usually less than the audit) and possible additional asset fees if the two plans separately fall below a breakpoint that they might if it were a single plan/contract.

This is a valid point but I know that we generally aggregate all assets of "affiliated" plans together for purposes of determining breakpoints. I assume that, especially with high assets, similar "deals" can be made with the providers.

[QDROphile]

RPG: Consider if that is a prohibited transaction because you are using the assets of Plan A for the benefit of Plan B (achieving the break point). There is no exception for practicality or logic under the PT rules and there is not a "no harm no foul" exception.

[Gadgetfreak]

I have ERISA attorney opinions that don't see any issues with this.The provider is allowed to cut their fees (not getting it from any where else) for any reason. I know of other providers that give preferred pricing for plans with a certain FA if the FA brings X business. Even NW charges plans less if their PPA/TPA has X amount of assets under management.