ADP Compensation

[Christopher Wilson]

Hello and Happy New Year. I have a controlled group of two companies. Company B isn't a participating employer. For what purposes is compensation aggregated among controlled group members and for what purposes is it not? When performing the ADP/ACP test, do I only use compensation paid to participants by Company A since compensation paid by Company B isn't eligible for deferral? Thank you.

[Larry Starr]

On 1/4/2020 at 6:16 PM, Christopher Wilson said:

Hello and Happy New Year. I have a controlled group of two companies. Company B isn't a participating employer. For what purposes is compensation aggregated among controlled group members and for what purposes is it not? When performing the ADP/ACP test, do I only use compensation paid to participants by Company A since compensation paid by Company B isn't eligible for deferral? Thank you.

Your first question is too broad to comment here. 

Your second question has an easier answer.  You are going to have to do complete non-discrimination testing, including all members of the controlled group who would be otherwise eligible but are not covered.  Obviously, the issue is the HCEs.  If there are no HCEs (not expected and not common) in the plan for Company A, then there is no need to testing.

It is not the compensation that is "aggregated"; it is the participants who are aggregated (counted) in the testing.  This assumes the normal situation of employees NOT working for multiple members of the controlled group (then you might also have a compensation testing issue since some compensation would be excluded, which itself could be discriminatory).

[justanotheradmin]

Larry's answer discusses the coverage /non-discrimination testing issue. 

I think the original poster is more likely asking about a scenario in which the employees receive compensation from both entities. The person is eligible to defer from their Company A compensation, but not their Company B compensation. 

For the answer in that scenario - I would look to your plan's definition of compensation (it may be in a basic plan document). Ours says that all compensation from the controlled group counts as Plan Compensation, even if a specific entity is not a participating employer and isn't otherwise included in the plan. This is separate from an employee who only receives compensation from Company B - and who might be included in non-discrimination testing - but isn't eligible for the plan. 

[Larry Starr]

42 minutes ago, justanotheradmin said:

Larry's answer discusses the coverage /non-discrimination testing issue. 

I think the original poster is more likely asking about a scenario in which the employees receive compensation from both entities. The person is eligible to defer from their Company A compensation, but not their Company B compensation. 

For the answer in that scenario - I would look to your plan's definition of compensation (it may be in a basic plan document). Ours says that all compensation from the controlled group counts as Plan Compensation, even if a specific entity is not a participating employer and isn't otherwise included in the plan. This is separate from an employee who only receives compensation from Company B - and who might be included in non-discrimination testing - but isn't eligible for the plan. 

Interesting; my parenthetical in the last sentence of my response was intended to deal with the situation of an individual who was in BOTH A and B but B did not adopt.  I have never seen language like you quote above; our plans don't do that.  What kind of document are you using?  If an employer hasn't adopted it, then the compensation from that employer does not count in every plan I've ever seen.  I'm not sure the language you note is even allowable; without doing the research I can't be sure, but I know there will be an issue with the deductions at the employer level for compensation paid by an employer that has not adopted the plan.  

[justanotheradmin]

I'm sure it varies by plan document, I've seen it as you describe, as well as how our document uses it. 

We use a pre-approved document from a large vendor.  The basic plan document has a variety of inter-related provisions (as all do). The Plan Compensation definition immediately references back to Total Compensation. Total Compensation definition references amounts from the Employer. The Employer is defined in part as "means the Employer that adopts this Plan and any Related Employer."  Related Employer is defined as control, affiliated service, etc. group. 

All of that might be kind of hard to follow for the average reader - so the drafters included extra language to make it clearer: 

There is a section of the basic plan document that covers Participating Employers and it specifically addresses this issue:

"Compensation of Related Employers. In applying the provisions of the Plan, Total Compensation (as defined in Section 1.141) includes amounts earned with a Related Employer, regardless of whether such Related Employer executes a Participating Employer Adoption Page."  

It goes on to mention how that default can be changed with elections in the adoption agreement. There is a separate portion of the basic plan document that addresses deductions, allocations of contributions, forfeitures, etc, for related and/ or participating employers. 

[G8Rs]

Just to elaborate on this for 415 compensation (used for 415 limits and TH) you must aggregate compensation from all "employers," which in this case is all members of the CG. For 414(s) comp (used for nondiscrimination tests, which includes the denominator of the ADP/ACP tests, and as pointed out, only matters if someone is getting comp from both companies), you must use 414(s) compensation. 414(s) comp starts with 415 comp and you can make certain adjustments, some are deemed to be nondiscriminatory and others must be tested. Excluding comp from an employer that is part of the CG, regardless of whether that ER adopted the plan, is not a safe harbor adjustment. Therefore, if you exclude the comp for the nonparticipating ER, then it's subject to annual 414(s) testing. This is generally operational in all plans - pre-approved plans aren't required to define 414(s) compensation. 

Last is compensation used to actually determine benefits. This must be defined in the plan. If you exclude comp from the nonparticipating member of the CG, then you can't have a designed based safe harbor allocation or benefit formula (because it's not a safe harbor method when comp doesn't automatically satisfy 414(s)). But as a practical matter, if you test the comp and it passes 414(s) then no problem. If you fail 414(s) then your benefit or allocation formula would be subject to general testing (and you'd have to use 414(s) in that testing).