Plan left a controlled group

[calexbraska]

We have a plan that was part of a controlled group.  As of 6/28 it was spun off and is now a stand-alone plan.  How do we do testing for 2018?  Do we have to do half the year as controlled group, half as a stand-alone?  Or can we just test based on how everything sits as of 12/31/18?  Does anyone know a section of the code or regs that deal with this issue?

Thank you in advance.

[C. B. Zeller]

I think you need to clarify the situation a little. A plan can not be part of a controlled group. An employer can be part of a controlled group, and an employer can sponsor a plan. Tell me if this describes the situation, and if so maybe it makes the answer to your question a little clearer:

Company A and Company B are a controlled group. Company A sponsors a plan. Company B adopts the Company A plan in writing. As of 6/28, 100% of the ownership of Company B is sold to Mr. X, an individual who is unrelated to the owners of Company A. As of that date, A and B are no longer a controlled group. On the same date, Company B revokes its participation in the Company A plan and adopts a new plan. The accounts belonging to the employees of Company B are transferred out of the Company A plan and into the Company B plan.

[calexbraska]

Yes, you are correct.  I meant that company was part of a controlled group, so their plan was historically tested on a controlled group basis.  The Company was spun-off, so they are no longer a part of a controlled group.  When in the controlled group, no other members of the controlled group participated in the company's plan -- they had their own plans.

So.... Company A and Company B are a controlled group.  Each company has it's own plan and they are tested on a controlled group basis.  As of 6/28, 100% of the ownership of Company B is sold to Mr. X, an individual who is unrelated to the owners of Company B.  As of that date, A and B are no longer a controlled group.  Each company retains its own plan.  Since they were part of the same controlled group for half the year, does Company B have to take that into account when testing, or does Company B just test its plan individually, assuming it is still a stand-alone plan as of 12/31/2018?

[C. B. Zeller]

Based on what you said I think the answer is that the Company B plan would have to include the Company A employees in its testing, but treat them as if they terminated on 6/28, since as of that date they were no longer employed by the company sponsoring the plan or any member of its controlled group.

[Tom Poje]

No one really knows. Derrin Watson the guru of gurus in regards to such issues has the following posts in the Q and A section the Benefits Links

Half-Year Exclusion for ASGs

(Posted February 22, 2003)

Question 252: A corporation is not a component member of a controlled group for a given year if the corporation is not a member during at least half of the days that precede December 31. Are there any such rules for the purpose of determining affiliated service groups? What if a service corporation is a member of an affiliated service group on January 1 but terminates its affiliation with the service group in March? Answer: I fear you are laboring under a misapprehension about controlled groups. Let me do my best to rectify it. so you will then understand my response for ASGs. It is true that IRC 1563(b) contains the component member rule you describe. (Q 9:5. References to "Q" are to numbered questions addressed in the third edition of Who's the Employer; they can be viewed online by subscribers.) Thus, for ordinary income tax purposes, if you are in a controlled group for half the year, you're in, and if not, you're out. But this rule is totally irrelevant for retirement plan purposes. (Q 9:3.) See Reg. 1.414(b)-1(a). Effectively, this means that controlled group status is determined on a day-by-day basis for retirement plan purposes. (Q 9:11 and Q 11:11.) Does it then come as any surprise that no similar half-year rule exists for ASGs? Like controlled groups, affiliated service group status is determined on a day-by-day basis. If ownership changes or a relationship ends to terminate ASG status, then from that point on the businesses are separate but before that date they are treated as a single employer. This result is unsatisfactory in many respects, but it is unquestionably the result that the law provides.

Filing for Midyear Changes in Controlled Group Status

(Posted September 8, 2001)

Question 125: Parent Company sells one of its subsidiary companies, Company B, in a stock sale on November 15, 2000. Company B continues as a participating employer in Parent Plan until March 1, 2001 when it establishes its own Plan and a transfer of assets from Parent Plan to new Company B Plan occurs thereafter. Parent Plan realizes it needs to be treated as a Multiple Employer Plan for January 1, 2001 - February 28, 2001. The question is whether it is also a Multiple Employer Plan from November 15, 2000 - December 31, 2000, or may it continue as a controlled group plan for 5500 reporting and testing purposes through December 31, 2000 by treating Company B as an additional component member of the group for the entire 2000 Plan Year under rules akin to the additional component member rules of Code Section 1563(b)(3)? Answer: IRC 1563(b) contains several important rules to make the controlled group system more rational and easier to administer. These rules say that if you are in a group for half a year, you are a component member of the group for the whole year. They also remove foreign corporations as component members of controlled groups, and effectively eliminate overlapping groups. And none of those rules apply for qualified plan purposes. None of them. Why? IRC 414(b) refers to members of a controlled group, not to component members. 414(b) only changes component member status, which is used for normal income tax returns and not for qualified plans. The regulations confirm this: For purposes of this section, the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a) (1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). [Emphasis added.] That's what the law is, and it is quite clear. Unfortunately, the regulations have been less than specific about what to do when you have midyear shifts in controlled group status. The 5500 instructions are completely silent on the point. Fortunately, it should not be much of an issue here. The only difference between filing for a multiple employer plan and a single employer plan is that you must file an extra Schedule T to show testing for IRC 410(b). That extra schedule T for the two months in question should be quite easy to fill out, because the plan should qualify for the free pass of IRC 410(b)(6)(C). Fill out the front page, check box 3e, and it's done. Of course, having said that you have a free pass of IRC 410(b), that does not mean you have a free pass for IRC 401(a)(4). Technically, for the two month period, the two must be tested separately. I know of no guidance on how this is to be done. Make a reasonable choice and it is unlikely you will be challenged. .................................................. the topic has also been discussed to a degree in the following:  https://benefitslink.com/boards/index.php?/topic/4578-plan-sponsor-no-longer-member-of-controlled-group/   https://benefitslink.com/boards/index.php?/topic/10442-410b-transition-rule-and-adp-testing/ ....................... good luck.