Defining the “company” with which a participant meets a last-day condition

[Peter Gulia]

Imagine a profit-sharing plan that allows § 401(k) elective deferrals, and allows a matching contribution.

 

A participant shares in a year’s matching contribution only if the participant is the Company’s employee on the last day of the year.

 

The plan narrowly defines the Company by naming only one organization, and ignoring its dozens of affiliates.  (The volume-submitter document states a “member” of a “controlled group” or an “affiliated service group” does not participate unless it adopts the plan with the plan sponsor’s approval.)

 

A worker who was the named Company’s employee for the first three quarter-years of 2017 became, on October 1, an employee of a non-U.S. organization that is the Company’s 100% wholly-owned subsidiary.  This worker is a citizen only of the USA.

 

Under a surface reading of the plan’s document, it seems this worker is not entitled to share in the matching contribution for the year ended December 31, 2017.

 

But is there something I should look for in the 128 pages that might support treating an employee of the subsidiary as an employee of the Company?

 

And if there isn’t, is it feasible now to amend the plan (without unraveling any tax-qualified treatment) to allow the transferred employee to share in 2017’s matching contribution?

 

[mphs77]

Are they passing coverage and non-discrimination testing while excluding non-adopting "members"?

[jpod]

I wouldn't no where to look in the document for a favorable solution.  However, while I believe what you say about what the plan says, what it says makes no sense.  If "Company" is defined to mean only the one named entity, then read literally that means an employee of an affiliated entity that adopted the plan would never be entitled to a match, even if he remained employed by that entity through the end of the year.  Since that makes no sense whatsoever, I would not be bashful about ignoring the literal definition of company, and concluding that the employee is entitled to the match as long as he is employed by any participating employer at the end of the year.  However, if the entity to which this particular employee was transferred is not an adopting employer, then you are out of luck presumably. 

[Peter Gulia]

jpod, sorry if my query was confusing.  The plan's document CURRENTLY refers to just one organization as the plan's sponsor and the only participating employer.  But the adoption agreement would allow adding participating employers.

Do you think it's reasonable to amend the plan retroactive to 2017?

 

[jpod]

Not outside of VCP.

[Peter Gulia]

jpod, thank you for the answer I feared.

For the situation described above, being harsh to the transferred employee means the employer pays nothing, not even the contribution the worker earned.

But being decent would require the employer to pay an extra $3,500 to persuade the IRS that no harm is done by reforming a document to provide a contribution to a non-highly-compensated employee who continues to be loyal to the employer.

 

[jpod]

They could always skip VCP, clean it up for 2018, and pay him cash equal to the lost match, assuming he's vested, or when he would have become vested in it.

[RatherBeGolfing]

They could always compensate the employee outside of the plan and amend prospectively.  Not quite the same but at least they would be able provide some sort of benefit to a loyal employee.

Edit:  I see jpod beat me to it 

[Peter Gulia]

jpod and RBG, thank you for the suggestions.

 

 

[Kevin C]

If it is a VS document, I would do some more looking in the document. It may be buried in there.  Our VS base document has a section titled "Operational Rules for Related Employer Groups" that contains the sentence "An Employee is not treated as terminated from employment if the Employee is employed by any member of the Related Employer group."

The definition of Related Employer also has "For purposes of applying the provisions under this Plan, the Employer and any Related Employers are treated as a single Employer, unless specifically stated otherwise."

 

If you still don't find anything, any chance the related employee(s) you want to add would meet the requirements for an -11(g) amendment? 

[Peter Gulia]

Could 26 C.F.R. § 1.401(a)(4)-11(g) support an amendment retroactive to January 1, 2017?

   

[card]

I believe the last day rule historically carried with it a "separation from service" requirement to justify not providing an allocation to an employee who had otherwise met the eligibility rules. Since the controlled group rules apply to section 410, I think an argument could be made that the employee is legally entitled to an allocation if he is still employed within the controlled group. However, setting out the specific legal argument for this would require a bit of research and time.