Not a Controlled Group When ER Thought it Was

[Benefits Vet]

Client has various levels of ownership in a variety of businesses, and was operating a single 401(k) plan for all of the companies under the assumption that it was a controlled group. Well, SURPRISE!! It is not a controlled group. Now what? I understand that we will have to re-run coverage and non-discrimination testing for the years in question.  But, any thoughts on how to handle this going forward? Form a multiple employer plan? The companies are all in the same industry. 

 

[Flyboyjohn]

Your reference to "Client" (capital C) makes me wonder if there is a Mr./Mrs. "Big" who really controls the whole show but there are other nominal owners that might keep it from meeting the definition of a controlled group.

If in reality "Client" controls the situation and is content with treating it as a controlled group for qualified plan purposes have you considered making it a controlled group through the use of options whereby "Client" is deemed to have the requisite ownership? 

[Benefits Vet]

Client is a holding company and has different ownership stakes in the subsidiaries. There are some options outstanding but not enough to make this a a controlled group as a whole. 

[Luke Bailey]

You don't have to form one, you ARE a multiple employer plan based on your facts. If the administrative savings are worth it, you can operate as such, but will need to apply ERISA's and the Code's various rules applicable to multiple employer plans.

[david rigby]

Caution, while it might be "...not enough to make this a controlled group as a whole...", it's possible some of the "...variety of businesses..." are a controlled group.  This probably does not change Luke's advice, but you will probably want to retain documentation of which companies are/are not members of a CC.

[Luke Bailey]

2 hours ago, david rigby said:

Caution, while it might be "...not enough to make this a controlled group as a whole...", it's possible some of the "...variety of businesses..." are a controlled group.  This probably does not change Luke's advice, but you will probably want to retain documentation of which companies are/are not members of a CC.

David makes a good point, chibenefits. I have found that there is really no way to do this analysis without making a very detailed org chart. The rules for attribution of ownership interests (based on family and business relationships) are extremely complex and factual scenarios can be very detailed with ownership of some entities that may be held in trusts, family limited partnerships, and the like. If noncorporate entities are involved, you have to know both capital and profits percentages.

[Benefits Vet]

On 1/2/2020 at 1:15 PM, Luke Bailey said:

David makes a good point, chibenefits. I have found that there is really no way to do this analysis without making a very detailed org chart. The rules for attribution of ownership interests (based on family and business relationships) are extremely complex and factual scenarios can be very detailed with ownership of some entities that may be held in trusts, family limited partnerships, and the like. If noncorporate entities are involved, you have to know both capital and profits percentages.

I agree. Client is working on one now, but as you seem to have assumed, it is complicated.