Key employee determination when using predecessor service

[TPAnnie]

Dr. Smith was an owner/employee of DOG Clinic until 6/30/2014.

He became an employee of CAT Clinic on 7/2/2014.

CAT Clinic's 401k PSP, which has a 1 year eligibility, with dual entry, recognizes prior service with DOG Clinic for all plan purposes.

Dr. Smith became a shareholder of CAT Clinic on 8/14/2015.

In determining whether Dr. Smith is key or not, would I consider his ownership of DOG Clinic and therefore he would be Key in the CAT Clinic Plan for both 2014 and 2015?

Or, since he was just a regular employee at CAT Clinic for 2014, would he be non-key for both 2014 and 2015, then become key for 2016?

Thank you!

[Belgarath]

I'm assuming this is not a controlled group/affiliated services group?

Without doing any research for confirmation, assuming no CG/ASG, I'd say he is non-key until 2016.

[Mike Preston]

Why not 2015?

[TPAnnie]

I'm assuming this is not a controlled group/affiliated services group?

Without doing any research for confirmation, assuming no CG/ASG, I'd say he is non-key until 2016.

Correct, it is not CG/ASG.

[BG5150]

Why not 2015?

I was thinking same thing. Unless ownership is 5% or less.

[TPAnnie]

Why not 2015?

If we don't count the predecessor *ownership*, he'd just be a non-owner physician of our group until 2015. So I think we'd start counting him as key in 2016, based on 12/31/15 determination.

[TPAnnie]

Why not 2015?

I was thinking same thing. Unless ownership is 5% or less.

Is his 2015 key or non-key designation not based on his 12/31/14 determination?

[TPAnnie]

I'm sorry I didn't mention before, his ownership is well above 5% beginning in August 2015.

[Mike Preston]

I think you are confusing issues. He is a key for 2015. However, if you are doing a calendar year test for being top-heavy or not in 2015 then you look to his status as key or not as of 12/31/2014.

[BG5150]

In other words, he is key in 2015, and as such, his 12/31/15 balance is considered as a key employee.

Also, if the plan is TH for 2015, and if the plan doc does not allcoate TH contribution to keys, he doesn't get one.

[Mike Preston]

In other words, he is key in 2015, and as such, his 12/31/15 balance is considered as a key employee.

Also, if the plan is TH for 2015, and if the plan doc does not allcoate TH contribution to keys, he doesn't get one.

Right.

[BG5150]

In other words, he is key in 2015, and as such, his 12/31/15 balance is considered as a key employee.

Also, if the plan is TH for 2015, and if the plan doc does not allcoate TH contribution to keys, he doesn't get one.

Right.

yay. I got one right. Forward this thread to my boss!

[Belgarath]

I'm confused - not an uncommon problem. Key employee status is determined for a plan year based upon the plan year that contains the determination date. So for 2015, you aren't a key employee unless you satisfied one of the key employee tests for 2014, because 2014 is the plan year containing the determination date.

So this person didn't satisfy one of the key employee tests in 2014, hence for 2015 is non-key. In 2015, the person then acquired ownership and therefore passes one of the key employee tests, so for 2016, is now key.

How are you reaching the conclusion that this person is key for the 2015 valuation, and ineligible for a TH contribution (if the plan is top heavy and plan doesn't allocate TH to keys)?

If it is because you think the rules require that you must count his ownership with DOG because CAT credits prior service with DOG for eligibility/vesting in CAT, (the OP's question) then if you are right, I'd agree. Off the cuff, I'm not aware that such a rule applies in the situation given, but perhaps it does. Otherwise, I'm still confused. If you do believe you must count the DOG ownership, do you have a cite?

Thanks.

[TPAnnie]

I'm confused - not an uncommon problem. Key employee status is determined for a plan year based upon the plan year that contains the determination date. So for 2015, you aren't a key employee unless you satisfied one of the key employee tests for 2014, because 2014 is the plan year containing the determination date.

So this person didn't satisfy one of the key employee tests in 2014, hence for 2015 is non-key. In 2015, the person then acquired ownership and therefore passes one of the key employee tests, so for 2016, is now key.

How are you reaching the conclusion that this person is key for the 2015 valuation, and ineligible for a TH contribution (if the plan is top heavy and plan doesn't allocate TH to keys)?

If it is because you think the rules require that you must count his ownership with DOG because CAT credits prior service with DOG for eligibility/vesting in CAT, (the OP's question) then if you are right, I'd agree. Off the cuff, I'm not aware that such a rule applies in the situation given, but perhaps it does. Otherwise, I'm still confused. If you do believe you must count the DOG ownership, do you have a cite?

Thanks.

I'm sorry I've been MIA!

This plan is top heavy and only gives TH contribution to non-key employees.

Belgarath's explanation is the way we've understood it and have been administering another plan for 10+ years. Since it comes up so often in that plan, we have a folder devoted to each year's determination, along with lots of research and notes. I pulled that plan's research file and came across notes where we addressed this exact issue in 2004 (working on a 2003 valuation). We have print outs from a TAG FAQ dated 8/6/02, a TAG response from Bill Joyner to our question about whether the TAG FAQ was still accurate dated 7/19/04 (Mr. Joyner said the answer was still accurate and valid), and a response from Corbel incident # we placed. All three state the same things as Belgarath did: under section 416(i)(1), "a key employee is any employee who at any time during the plan year containing the determination date for the plan year in questions or the 4 preceding plan years...met the key requirements".

Like Belgarath asked, are you coming up with your answer because of prior ownership being taken into account, or have the determination rules changed and we've been screwing it up?

Thank you all for your help!

[TPAnnie]

Adding: I'm sorry to keep beating this horse, but as you can imagine, when I go in there with 2014's valuation, not only showing this doctor/owner, one of 1/2 dozen, receiving top heavy for 2014, but also telling the group that they're going to have to give it to him for 2015's plan year - yeah, well that will be fun.