DB Plans and 415 limits

[Belgarath]

Suppose John James had a DB plan years ago (1 man business, made scads of money, put a ton into a DB plan, ten ultimately terminated plan and rolled funds over to IRA). Now, some years later, he has another business. Wants to set up a new DB plan.

Do 415 limits take into account the benefit paid to him under the prior plan? I don't think he's a "predecessor employer" but it just doesn't feel right, somehow, yet I'm not sure there is actually a problem. I'd appreciate any insights.

P.S. - I have no idea what type of entity prior business was. Would it make a difference if he was a sole prop? I seem to recall that sole props "last forever" for some purposes.

[Mike Preston]

If he owned 100% of both entities there is no way to escape aggregation.

[Belgarath]

Thanks Mike. You wouldn't, by any chance, happen to have a citation? I can see where 415(b) limits the benefits for all plans of an "employer" - but what about when they are corporations? For example, I form Corp A that manufactures Pixie Dust, and terminate that plan(and dissolve that corporation) in 1995. In 2015, I form a new corporation that sells pieces of the Golden Gate Bridge. I'm just trying to determine the authority for "aggregating" these two plans for 415 purposes? It doesn't seem like 1.415(f)-1(c)(2) really "fits" this situation, so I'm trying to confirm the correct interpretation here.

[mphs77]

Bel,

 

I think you need to look at the Controlled Group rules for that info.

 

And as I recall the threshold for 415 limitation is only 50%

[Mike Preston]

In Los Angeles for ASPPA conference.  Hit me up next week if you haven't found what you are looking for.

[Belgarath]

MPHS - thank you, but I still fail to see how, in my example, this would constitute a controlled group. The general rule is that the corporations must exist simultaneously for at least some period of time. Alternatively, the "predecessor employer" rule contemplates a couple of different situations - one where the new employer maintains a plan under which the participant had accrued a benefit, or there is a transfer of benefits from the former employers plan, or, if under the facts and circumstances, the new employer constitutes a continuation of "all or a portion of the trade or business of a former entity."

In my example, I fail to see how either of these would apply. Now, it might be a different answer if the prior entity was a sole proprietorship.

If you have some citation or authority for considering the situation in my example a controlled group, I'd greatly appreciate it if you could refer me to that citation/authority.

Basically, I'm very concerned that there is something I might be missing, that would require aggregating the benefit under the very old, terminated DB plan, and any new plan that might be established. As I said, it doesn't "feel" right, yet I've been unable to find a solid reason that requires such aggregation for 415 purposes. And it may be that it is something simple that is right under my nose.

Thanks. And Mike, enjoy the conference. Hopefully there will be a resolution of this question before you get back!

[mphs77]

I am not sure that both entities must still be active for the controlled group issue to be settled. But lets look at the possible "predecessor employer" possibility.

How would it not be a continuation of all or a portion of the trade or business of the former entity and thus a the new business is a successor entity? Thus the prior plan, while not maintained, would still be considered for 415 maximum purposes.

You do agree that as per 1.415(f)-1(a)(1) requires that even a terminated plan, from which benefits have been paid, must be considered when determining whether or not 415 limits have been exceeded?

[Belgarath]

Thanks MPHS.

I'd ask, how WOULD it be a continuation of all or part of the trade or business of the former entity? Other than same owner, they are totally unrelated in every possible aspect, and many, many years between the liquidation/dissolution of one corporation and the establishment of another.

And no, I don't agree that 1.415(f)-1(a)(1) requires consideration of the prior terminated plan in this situation. This regulation section refers to a terminated plan of the "employer." In this case, it is NOT the same employer - it is a separate corporation, hence a different "employer." So that's when I moved on to the possible "predecessor employer" issue, and I'm not reading that as applying in this situation either.

Thanks again, and I look forward to any input you may have.

[mphs77]

How is it not a continuation of the same trade or business? Did the owner cease to be say a lawyer and become a plumber?

Without more information I have to assume (a dangerous thing) they are working in the same filed as before. Therefore it is a continuation of the same trade.

I could easily be wrong here, but stop and think...if all it took to gain back large benefits in a Plan, then all small businesses would have terminated their Plans in 1983 after TEFRA kinked in to lower the 415 limit and start a new company and new benefits and I don't recall that happening.

[Belgarath]

7 minutes ago, mphs77 said:

How is it not a continuation of the same trade or business? Did the owner cease to be say a lawyer and become a plumber?

My example from above - For example, I form Corp A that manufactures Pixie Dust, and terminate that plan(and dissolve that corporation) in 1995. In 2015, I form a new corporation that sells pieces of the Golden Gate Bridge.

I agree that if it is the same business/trade, or "all or a portion" of the business/trade, whatever, then it must be looked at carefully under the predecessor plan rules of 1.415(f)-1(c)(2), which is "facts and circumstances."

Now, my example is hypothetical. In real life, I expect it is much more likely to be the same general business, although that isn't a given. And we would, of course, recommend ERISA counsel to assist the client with making the ultimate determination. I don't know at what point the "facts and circumstances" might support a finding that no aggregation is required. 4 years? 10 years? never? As I said, I haven't found anything concrete, and there may well not be any such concrete guidance, but I'm hoping there is some (one way or the other) that I've missed.

Thanks again for your response, and any future input - I do appreciate it!

 

 

[Lou S.]

It would be nice if the IRS had crystal clear rules on this. I'm not sure they do but I suspect they would take the position of "walking back" the controlled group rules for purposes of 415 and extending it under the predecessor plan rules.

That is to say I would tend to agree with mphs in his analysis above.

[AndyH]

FWIW, there's no question in my mind that aggregation is required.

 

Excerpts from Internal Revenue Manual

4.72.6.2.1.1  (08-09-2016)
Employer

 

1. IRC 415: Treat all employees of these entities as employed by a single employer per IRC 414(b),(c) and (m):

   1. All corporations which are members of a controlled group of corporations (per IRC 1563(a), as modified by IRC 1563(f)(5) and not considering IRC 1563(a)(4) and (e)(3)(C)).

   2. All employees of trades or businesses (whether or not incorporated) which are under common control.

   3. All employees of the members of an affiliated service group are treated as employed by a single employer. See Treas. Reg. 1.415(a)-1(f)(1) and (2).

2. When applying IRC 414(b) and (c), replace the phrase "at least 80 percent" with "more than 50 percent" in IRC 1563(a)(1), except to determine whether two or more organizations are a brother-sister group of trades or businesses under common control (IRC 415(h) and Treas. Reg. 1.415(a)-1(f)(1)).

3.  

 

 

4.72.6.2.1.2  (08-09-2016)
Plan

 

1. A DB plan is any plan which is not a DC plan (IRC 414(j)). Under a DB plan, participants accrue a benefit each year under a formula that must be explicitly stated in the plan. See Treas. Reg. 1.401-1(b)(1)(i) and Treas. Reg. 1.401(a)-1(b)(1)(i) and (iii).

2. When you apply IRC 415(b) limits, treat all DB plans (whether or not terminated) ever maintained by an employer (or a predecessor employer) as one DB plan (IRC 415(f) and Treas. Reg. 1.415(f)-1(a)(1)).

[KJohnson]

Just a PLR but the "require that controlled group members exist concurrently" comment might be relevant

http://employerbook.hypermart.net/PLR9541041.htm

The operation of section 414(b), (c) and (m) and the regulations thereunder necessarily require that controlled group members exist concurrently. Accordingly, with respect to the first ruling, we conclude that the Predecessor Employer and Employer B are not members of a controlled group of corporations or other entities nor members of an affiliated service group for purposes of section 414(b), (c) and (m).

[Belgarath]

"When you apply IRC 415(b) limits, treat all DB plans (whether or not terminated) ever maintained by an employer (or a predecessor employer) as one DB plan (IRC 415(f) and Treas. Reg. 1.415(f)-1(a)(1))."

Again, my example: For example, I form Corp A that manufactures Pixie Dust, and terminate that plan (and dissolve that corporation) in 1995. In 2015, I form a new corporation that sells pieces of the Golden Gate Bridge

Andy - this is precisely my point in my example. Let me make it clear - I ABSOLUTELY agree, and understand, that plans, even if terminated, of the "employer or a predecessor employer" must be aggregated. In my example, it clearly isn't the same employer. (My example assumes corporate status, NOT self/employed.)The question then turns on whether this (the Golden Gate Bridge sales Corp) is a predecessor employer.

If it is your position that any business ever owned by the same person, regardless of type, time gap, etc., is a predecessor employer, then that's fine. But nothing in the Manual sections you quoted above supports that. (Well, I suppose that if your interpretation of the controlled group rules is that you have a controlled group even if the corporations don't even come CLOSE to existing in the same time, then the manual sections quoted would support a finding of predecessor employer status due to CG status.) But, I don't see that as a valid interpretation. Derrin Watson's book doesn't, either.

I'm getting a feeling that there isn't any guidance, other than what has already been discussed, on this issue that is at all definitive, so we are left with varying interpretations, and facts and circumstances. In the absence of additional guidance, I'm now comfortable with my general assumption that in the unusual example I posited, there probably is no predecessor employer status. I would, of course, leave this to the employer and ERISA counsel for a final determination.

(FWIW - some additional information on the "real life" situation that prompted this discussion has just come to light, and I think it is far more likely that it would, in fact, be a predecessor employer situation!! Turns out it is the same type of business, with a time gap of only 3 years or so)

Again, I sincerely thank you all for your input, and taking the time to discuss this - and I'd still love to see references to any other guidance that I've missed, or hasn't been mentioned yet, that might clarify all this!

[Calavera]

Would Affiliated employers rules apply in this case? See 1.415(f)-1(b). And in this case your old terminated plan will be considered a formerly affiliated plan.

Also see 1.415(f)-1(c)(2): Where plan is not maintained by successor. With respect to an employer of a participant, a former entity that antedates the employer is a predecessor employer with respect to the participant if, under the facts and circumstances, the employer constitutes a continuation of all or a portion of the trade or business of the former entity. This will occur, for example, where formation of the employer constitutes a mere formal or technical change in the employment relationship and continuity otherwise exists in the substance and administration of the business operations of the former entity and the employer.

Of course you may say that it is not a continuation of the trade or business, but it definitely the same administration of the business operations.

[Belgarath]

In my original example, 1.415(f)-1(b) would most certainly not apply. Neither an ASG, nor a break-up of an ASG, nor an affiliated employer, nor an affiliated plan.

The "predecessor plan" rule in (c)(2) is the "facts and circumstances" portion that is a cause for concern that has been under discussion. And while in my unusual example I feel reasonably confident that there wouldn't be a "predecessor employer" absent new citations coming to light - in the real life situation at hand, I wouldn't dare venture an opinion. That will be left up to ERISA counsel, if the potential client even engages counsel. I most certainly would not go out on the limb on this one!

Thanks, as always, for the input.

 

[Calavera]

Affiliated employers rules are not referred to ASG. They are referred to affiliation rules described in 1.415(a)-1(f)(1), which is about controlled group. I would think that the fact of one entity being terminated long time ago will not take it out of controlled group situation under one common owner.

[Belgarath]

I'll defer on that question to my personal favorite guru in this arena, Derrin Watson. Infinite are the arguments of the mages, but Derrin is very clear that two corporations cannot be a controlled group if they do not exist at the same time. Question 8.18 in his book, Who's the Employer, if you have access to it. And coincidentally, he notes that this question most often arises in connection with 415 questions! (now, if the original business was a sole prop, then we'd have a different result, apparently)

I'm sure that not every attorney would necessarily agree with Derrin on this, so there may well be opinions by other ERISA attorneys out there...

Thanks again.

[Calavera]

Guru indeed. Then it means we are missing something. Otherwise it would be too easy to get out of 415 rules.

[Belgarath]

I'm very willing to admit that I'm missing something! And I'm hoping that if so, someone can point it out. Also, FWIW, Derrin discusses the "predecessor employer" concept, in this context, in more detail in questions 10:10 and 19:28 of his book.

I'm going to let this percolate in my so-called mind this weekend, in hopes of some flash of wisdom, but that's probably an exercise in futility.

Have a great weekend!

[dan.jock]

I was reaching this some time ago and arrived at the following conclusions using who's the ER.

I generally agree with Belgarath about corps.  AFS and terminated plans aside for now.  Let's deal with sole props.  Where is this rule that a sole prop exists in perpetuity?  Thus 415 cannot be restarted for a different business later in life.  I think the cite above from the revenue manual that "  All employees of trades or businesses (whether or not incorporated) which are under common control. " is weak for this purpose...I'd need something more to be able to argue this as an IRS agent against a deduction.

 

Cite for corps:

Ex 8.18.3 says that proposed regulation under 414(o) provided that entities existing at disjoint time periods are aggregated for 415(b) limits, and then this language was withdrawn from final regs indicating the contrary to be the case.  The commentary below the example alludes to this.

 

Q 10.10 speaks to predecessor employers and 415.  Specifically 10.10.2 provides that a predecessor employer relationship exists if the new entity’s business is not substantially different than the prior.  The case law cited supports this.  In the absence of a predecessor employer relationship, a controlled group does not exist for organizations that don’t exist at the same time.  Thus 415 is not aggregated.