Controlled Group Change - New Company - New Plan timing

[Lou S.]

Facts

Owner - O owns 100% of Company A

In October 2017 - O sells 60% of Company A to unrelated 3rd Party

Owner - O starts Company B which he owns 100%

Company A is an on going concern with employee staff

Company B is new company that employs 2 employees, both of whom will be  highly compensated plus the Owner.

Owner O wants to set up a plan that excludes owner O but covers the 2 employees of Company B.

Company A and Company B are both calendar year tax payers.

For Calendar Year 2017 Company A and Company B are a controlled group.

For Calendar Year 2018 Company A and Company B will not be a controlled group assuming there is no change in ownership.

There are no affiliated service group issues to consider with Company A and B

Questions

1. Can company B establish a profit sharing plan for calendar year 2017 covering only the new hired non-owner employees of B with out covering any employees of A? I believe this is yes because the newly hired employees would both be non-highly compensated employees as they had no pay from Company B in 2016.

2. Does this change if the are being hired from A where they earned over the dollar limit in 2016 to make them an HCE is company A in 2017?

3. Can they start a DB plan for calendar year 2017 for company B not covering A? I believe this is a big no as 401(a)(26) would be problematic.

4. Can Company B start a DB plan effective November 1, 2017. Have a non-fiscal year plan running 11/01/17 - 10/31/18 and ignore Company A altogether as the transaction was completed in October 2017.

 

 

 

 

[ETA Consulting LLC]

I think I see what you're getting at:

Owner O sells 60% of Company A and becomes a 40% Owner in A.  Owner O, who is now a 40% owner in A, creates Company B and is 100% owner in B.  How is that a controlled group?  Let's assume that B was created at a time O owned 100% of A.  Now, A & B would be a controlled group.  At the time O sells 40% of A, they would cease to be members of a controlled group.

This must be established before even discussing Compensation.  Any employees of Company B would be free to do whatever they want without regard to A after they are no longer members of the same controlled group.  Once we determine controlled group status; and when it ends, you would then determine if there is a 'severance of employment' for each employee as they move from Company A to Company B.

I think that's what you're getting at, but would be sure to carefully flow chart each fact pattern as it relates to the applicable rules.  You'd start with the detailed Controlled Group Analysis: 1) Does a controlled group exist?  2) If so, when.  3) When does the companies cease to be members of a controlled group. 4) Is there a severance from employment when an employee moves from one company to the next.

That's how I would approach it.  When I'm done, I'd recheck my facts against the rules.

Good Luck

 

[Lou S.]

Maybe I'm confusing rules. I thought you had to look at highest percentage ownership at any time during the taxable year? Or is that only for HCE determination, Key Employee determination wrt Plan Year?

As I said both are calendar year tax payers.

Company A was owned 100% by Owner O from 1/1/17 - 10/??/17

Company A is owned 60% by owner O and 40% by unrelated 3rd party(ies) from 10/??/17 - 12/31/17

Company B is an LLC taxed as a sole proprietorship formed 11/??/17 and owned 100% by Owner O.

Oh and it is quite possible Owner O has had different sole proprietorship income in the past if that matters.

Both non-owner employees of Company B have been full time employees of Company A for 3+ years and will continue to be employees of Company A as well as Company B for the foreseeable future and both earned sufficient compensation in 2016 to make them HCEs in 2017 for Company A . Both employees would be the sole participants of any Plan that B may establish.

I'm having a hard time not seeing a controlled group for 2017 but I'd love a citation to show I'm wrong.