2 separate plans - one for union one for regular - asset account question

[HarleyBabe]

We are setting up 2 separate plans for a particular 401(k) because to leave as one, the required contribution for the union employees, will now make their former safe harbor match only plan subject to Top Heavy requirements. Council and I decided best to separate.

Question comes up from the advisor and this is where I need some guidance. Currently the funds are on one of the mutual fund platforms. The advisor wants to set up a separate division under the same contract in order to for cost to participants to remain down rather than a completely separate contract. Obviously, I'm not a financial advisor but my question is, is that okay? Can the funds of two separate plans be under the same contract at the financial institution but set up as a separate division basically. What questions do I need to ask to make sure my asset accounts are in compliance with 2 separate plans.

[ETA Consulting LLC]

I think they can. Each plan would have its own document and its own trust agreement; and the assets would each remain subject to their own respective agreements. Technically, they'd merely share a trust account. There would, really, be no commingling of assets between the two plans, but merely an account setup function.

I don't see any potential issues as long as the plan are recordkept correctly.

Good Luck!

[HarleyBabe]

Thank you for the quick reply. I think it would be okay too but I just want someone else to agree.

[austin3515]

http://www.dol.gov/ebsa/pdf/2015-5500inst.pdf

Page 33 of the schedule H instructions:
If the assets of two or more plans are maintained in a fund or account that is not a DFE, a registered investment company, or the general account of an insurance company under an unallocated contract (see the instructions for lines 1c(9) through 1c(14)), complete Parts I and II of the Schedule H by entering the plan’s allocable part of each line item.

If you go back before my time this was actually quite common with the paired money purchase/profit sharing plans.

One caveat is that it is treated as a single plan for the audit requirement. I tried to find my site for that without luck. Anyone?

[ETA Consulting LLC]

But, the assets ARE held in Registered Investment Companies (aka Mutual Funds); so this instruction would not seem applicable.

Good Luck!

[austin3515]

Hmmm... I hope someone chimes in here. Again, most many plans pre-EGTRRA were done this way, so I hope someone can help out.

I will say this though. The site clearly suggests that assets for 2 plans can be commingled and the context is merely referring to reporting.

[MoJo]

I think the answer to the question depends on what you mean by "contract" and whether the "commingling" of the assets makes one plan's assets available to satisfy the other plan's liabilities.

This boils down to whether the contract defines the pool of assets for the "plan" or whether the plan defines the pool of assets (i.e. as contained in a trust). Recordkeeping efficiencies do not change the definition of "trust" for legal purposes - so having assets commingled on a recordkeeping platform is irrelevant to what constitutes t assets of a single plan (as long as the recordkeeper can identify the assets belonging to each plan - which many do by using a "location" code or other identifier.

If the contract is a "wrap" (insurance)contract, then the assets may actually be commingled within the separate account (invested possibly in MF's or clones) and that would be problematic (at least to me).

[HarleyBabe]

Now I am really confused. My head is spinning. Let me throw in the asset platform is Transamerica. I guess my issue is 2 separate plans that would have 2 separate Trust IDs so how can we have 1 contract at Trans. The advisor is suggesting that we separate these with division codes, ie union vs non-union but under the same Trans contract and that it will be fine as long as they are record kept separately. I would agree with that if we were using 1 plan and just separating the union vs nonunion. We are creating 2 plans to begin with in order to avoid top heavy requirements because the required profit sharing contribution to the union members based on the union contract takes us out from the umbrella of a "safe harbor only plan". It was suggested at ASPPA to just make 2 plans, problem solved. The advisor is simply trying to provide the client the advantage of good pricing by not having an entirely separate investment contract that starts with no assets. Does any of this help?

[My 2 cents]

My involvement is with defined benefit plans, but is it not the case that if a single 401(k) plan covers employees subject to a collective bargaining agreement and employees not subject to a collective bargaining agreement, then, even if the plan is top-heavy, the plan can provide that the employees covered by the collective bargaining agreement don't have to be given either top-heavy minimums or vesting? If that is so, why would it be necessary to separate the plan into two plans?

[HarleyBabe]

That's not the point. The issue is that making a profit sharing contribution to the union folks takes the current plan out from the umbrella as not subject to top heavy at all because it was a safe harbor only plan. It can no longer be a safe harbor only plan and therefore not subject to top heavy if the union people have to receive a profit sharing because of their agreement.

[MoJo]

Keep in mind that what is a "plan" is a "legal definition" while what the recordkeeper calls a "plan" is an accounting distinction. I've had multiple plans recordkept by the RK as a "single" plan - as long as the LEGAL requirements are met to make sure they are still separate plans. That means separate documents, separate "trusts" (again, a legal distinction, not an accounting one - which essentially means safeguarding assets so that one plan's assets can't satisfy the other's liabilities), separate Forms 5500, etc. How the RK keeps the records is irrelevant AS LONG AS they can separate them for purposes of the legal requirements.

[austin3515]

Wait just a minute...

If the assets of two or more plans are maintained in a fund or account that is not a DFE, a registered investment company, or the general account of an insurance company under an unallocated contract (see the instructions for lines 1c(9) through 1c(14)), complete Parts I and II of the Schedule H by entering the plan’s allocable part of each line item.

I figured this out. Let's assume all mutual funds. What this note is saying is that you should simply report the mutual fund balance for each plan separately on each plan. If on the other hand the investment was NOT a mutual fund (for example a separate account that is not a DFE) you should instead report each plan's pro rata share of the underlying investments (which might be mutual funds, stocks, bonds, whatever). It is not precluding the commingling of investments, only clarifying how to report on funds that do not meet the nice exceptions regarding MF's and DFE's, etc.

But still I come back to the audit question as the only real complicating factor. But the terminology of "assets being available to pay benefits of the other plan" does seem to rign a bell in whatever it is I am discussing. Because that is the only barrier to commingling (in my opinion) assuming you are not approaching the audit requirement I would not worry.

Also, check with the recordkeeper as I'll bet you they have a lot of contracts that include more than 1 plan.

[MoJo]

EXACTLY, Austin. If every plan in the wold had to have their own account with every mutual fund they invested in, the entire industry would grind to a halt (EVERY recordkeeper uses "omnibus" accounts when trading with mutual funds -with the distinction of which plan has what being an "accounting" function). I don't think the "audit" issue is an issue - IF the RK can actually produce the required "reports" based on the location code (or whatever device they use to "segregate" plans....

[austin3515]

Well you hit on interesting point. The Mutual Fund recordkeepers run a software program that is nothing more than a really supped up spreadsheet. Someone other department maintains a giant trust account with 4,522.454 shares of Fund ABC. So the investments are in a single commingled pool for purposes of being able to fund the benefits of the other. Hence the single plan treatment for purposes of the audit. At least I think that is how the story goes...

[HarleyBabe]

Thank you all so much. I guess it just seems not okay although I don't know what I base that on. We are no where near the audit requirement so I suppose as long as I record keep them separately I'll give the all clear.

What about plan names, I mean we'll have two separate plan names. Should I have the investment institution somehow be able to notate that. Suggestions on that piece?

[austin3515]

The ABC and XYZ 401(k) Plans.

Better check with the recordkeeper though, sometimes even the best plan designs get decimated because of system limitations...

[MoJo]

Well you hit on interesting point. The Mutual Fund recordkeepers run a software program that is nothing more than a really supped up spreadsheet. Someone other department maintains a giant trust account with 4,522.454 shares of Fund ABC. So the investments are in a single commingled pool for purposes of being able to fund the benefits of the other. Hence the single plan treatment for purposes of the audit. At least I think that is how the story goes...

I disagree.... If you define the "trust" as being at the level of the recorderkeepers recordkeeping balances based on location code (or other identifier), then no, the assets are not available to fund the benefits of hte other plan. If you define "trust" as the reocrdkeeper's "plan" (or contract, or whatever) or at the mutual fund omnibus account level, then yes, they would be - but that is a ridiculous argument (especially at the "omnibus mutual fund account." I don't know how many "plans" fidelity recordkeeps, but I can assure you they have only ONE account at each mutual fund they do business with, and process "net trades" daily with them (that is, one trade each day FOR THEIR ENTIRE BOOK OF BUSINESS). Same for Schwab, Wells Fargo and pretty much most recordkeepers... That is NOT considered commingling, nor would it be considered commingling for a recordkeeper to have multiple plans under one "plan id" on their recordkeeping system, SO LONG AS they have a way to separate them for reporting purposes (and benefit payments, etc.).

[austin3515]

But those are regulated financial institutions, so if they recordkeep it separately at CUSTODIAL level (not the recordkeeping level) than it's separate by any reasonable definition. Yes of course I understand what you just said is true but you're going one step too deep in the operations of Fidelity in my opinion.

[ETA Consulting LLC]

Keep in mind that what is a "plan" is a "legal definition" while what the recordkeeper calls a "plan" is an accounting distinction. I've had multiple plans recordkept by the RK as a "single" plan - as long as the LEGAL requirements are met to make sure they are still separate plans. That means separate documents, separate "trusts" (again, a legal distinction, not an accounting one - which essentially means safeguarding assets so that one plan's assets can't satisfy the other's liabilities), separate Forms 5500, etc. How the RK keeps the records is irrelevant AS LONG AS they can separate them for purposes of the legal requirements.

Thank you! Thanks again! Oh, by the way, thank you!

Good Luck!

[MoJo]

But those are regulated financial institutions, so if they recordkeep it separately at CUSTODIAL level (not the recordkeeping level) than it's separate by any reasonable definition. Yes of course I understand what you just said is true but you're going one step too deep in the operations of Fidelity in my opinion.

Again, how you define "custodial" level is what distinguishes "plans" from each other. I worked for a large recordkeeping firm (someone you theoretically can "Talk" to) who never had "custody reports or "trust statements" relying ENTIRELY on the RK system to show what belonged to whom. They operated as if the RK system WAS the trust accounting system - and hence, had a SINGLE account at the captive bank that served as "trustee." Same thing as having multiple plans under ONE RK "ID" (and they did it often - using a location code to distinquish between the plans (of related companies, of course).

[austin3515]

Wow, that does not sound kosher at all. 300 plans commingled in one trust account at ABC Bank And Trust? That does not sound right, UNLESS of course we're talking about a regulated financial institution. After they are just recordkeepers at the trust level. They have systems in place to track trust accounts just exactly like a RK does it for participants. ABC Bank and Trust gets one check from Fidelity for $1,275,342.64 for a dividend from Fidelity Magellan Fund. ABC Bank and Trust applies that to each client it has on its system. But because ABC is a regulated financial institution, I need not go that deep into their operations. I can simply rely on the statement I got from ABC Bank.

[BG5150]

Is everyone going to have their own account? If so, I see no problem with it. R/K has on its system a group of individual accounts called the ABC, Inc. Retirement Plan. Plan #12345. Under the plan #, there are 6 accounts, 3 of which belong to the non-union plan, and three that belong to the union plan. The r/k system can make a distiction between them by assigning the individual account a sub code, the "division" or, rather which true plan they belong to. While reports might not be the cleanest, it would be easy to see how much and what transactions happened in each division to properly administer the plan.

Just becasue a r/k culls a bunch of accounts under a plan # doesn't mean they all belong to the same plan. (I mean they COULD do that, not that they do.)

We have the exact same setup, wherein two plans of the same employer are in a single "account" with the custodian. Record keeping can be difficult at times, but doable. Side note: the plans are separate plan #'s on our r/k system. Its jsut all the funds are in acct # Ab6789T at the custodain.

[austin3515]

yes, we all know it is doable/ The ONLY question (at least for me) is if there are 65 participants in Plan A and 65 in Plan B, is an audit required.

Someone mentioned pooling 300 unrelated plans in a single trust account, and I think that is extremely uncool. I have commingled two plans in one contract for related entities/plans, but that is it.

[BG5150]

I say no audit. They are still two separate plans. Just b/c some r/k puts everything under one "plan number" doesn't make it one.

[austin3515]

I couldn;t agree more, that has nothing to do with it. IT's the commingling of the underlying assets.

[MoJo]

yes, we all know it is doable/ The ONLY question (at least for me) is if there are 65 participants in Plan A and 65 in Plan B, is an audit required.

Someone mentioned pooling 300 unrelated plans in a single trust account, and I think that is extremely uncool. I have commingled two plans in one contract for related entities/plans, but that is it.

No audit. The requirement for an audit is to the LEGAL plan - not the administrative one.

As far as "300 plans in one trust account" - NO! There were 300 plans each with their OWN trust, administratively held omnibus-ly by a bank. Each plan had it's OWN TRUST, but tat was defined by the RK who maintained "records" of what assets belonged to which trust.

[austin3515]

Each plan had it's OWN TRUST, but tat was defined by the RK who maintained "records" of what assets belonged to which trust.

But the recordkeeper was not the regulated financial institution? Just some 3rd party? That just sounds awful to me. Now, if John Hancock, Empower and Fidelity do that, so be it - they are a regulated financial institution.

[HarleyBabe]

Thanks All - I take this one step further into the mechanics now. So, we say, OK to the same account. However, we have 2 plan names, 2 plan requirements.... We need 2 sets of enrollment paperwork obviously because it's a different plan correct? Therefore, can't just use the other plans paperwork for enrollment. Also, they will need to somehow show the other plan name so that when the participant logs in they see the plan name they are a participant within, correct? And, to the actual transfer, currently these folks are in the current plan. Once I have the new plan established, how is the transfer handled? I may not be terming this correctly but if we are moving money out of one area into another, it's not a distribution so how mechanically and for reporting purposes is this handled.

Thank You.