Controlled Group and Compensation

[Gilmore]

An individual owns is 100% owner of a company sponsoring a non-elective safe harbor 401(k) plan.  After several years the same individual starts a new company in in which he owns 85%.  The new company will not be adopting the existing 401(k) plan and will not adopt it's own plan.

The plan document defines compensation as all compensation paid by the "Employer" and references the controlled group/affiliated service group code sections.

Am I correct that for allocation purposes, if a participant earns compensation in both companies, all of the compensation would need to be included unless the plan was amended to specifically exclude it?  Further, if the compensation from the new company was to be excluded under the plan, the compensation would need to be tested for it to be used for testing purposes and the safe harbor contribution?

Thanks very much.

[justanotheradmin]

That's a complicated question. 

If the person is self-employed and receives self-employment income from the business the answer might be no. Usually the only the trade or business involved can count self-employment income. If they receive W-2 based compensation the answer might be yes. I'd also suggest reading your basic plan document. 

There was an ERISApedia webcase on Compensation recently that if I recall covered this question. You may be able to look through the slides for an answer, or you can listen to it, I believe it's available on demand. 

[Larry Starr]

6 hours ago, Gilmore said:

An individual owns is 100% owner of a company sponsoring a non-elective safe harbor 401(k) plan.  After several years the same individual starts a new company in in which he owns 85%.  The new company will not be adopting the existing 401(k) plan and will not adopt it's own plan.

The plan document defines compensation as all compensation paid by the "Employer" and references the controlled group/affiliated service group code sections.

Am I correct that for allocation purposes, if a participant earns compensation in both companies, all of the compensation would need to be included unless the plan was amended to specifically exclude it?  Further, if the compensation from the new company was to be excluded under the plan, the compensation would need to be tested for it to be used for testing purposes and the safe harbor contribution?

Thanks very much.

I would have to read and parse the specific language in the document.  I would NOT want a plan document that included compensation from other entities in a controlled group that we might not even know about; I think that is just bad language.  For example, you can have a German parent company that owns two US companies but the two US companies don't even know that they are connected (I had just such a case many years ago). You obviously know you have testing issues with regard to the multiple members of the controlled group, but as to compensation, I would absolutely want to read the specific words in the document and if the language is as you suggest, get rid of that document!

Also, I would discuss with the client WHY he had employees moving back and forth between the two entities.  We might accomplish that (if absoulutely necessary) by NOT having two separate W-2s.  FWIW.

 

[Gilmore]

Sorry for the late followup, bogged down with testing.

Thank you for the responses.  I was thinking more in terms of the owner possibly getting compensation from both companies and then started wondering about other employees with compensation possibly from both.  I will go back and revisit the document language and check with our document provider.

Thank you.