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When is ownership determined for coverage testing?

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Company A and Company B are both corporations owned 100% by Fred so we obviously have a brother-sister controlled group.  Both Company A and Company B sponsor 401(k) plans - both have 12/31 PYE, same HCE definition, and current plan year testing for ADP/ACP.  Historically the Company B 401(k) plan has failed coverage testing so the plans have been aggregated to pass coverage and ADP/ACP.

Fred sells 100% of his stock in Company B to his best friend Barney on December 1, 2021, so there is no longer a controlled group.  Nothing else changes other than the stock ownership and there is no affiliated service group.

1. Are the employee populations of Company A and Company B required to be combined for coverage in 2021?

2. If they aren't required to be combined, can the plans be permissively aggregated for 2021 (and 2022 if desired)?

I assume 1 is no and 2 is yes since the 410(b)(6) transition rule allows the parties to a stock acquisition to test their plans for coverage and nondiscrimination purposes as though the transaction did not occur, but I'm just not 100% confident in my thinking... or there was too much holiday cheer last week and my brain still isn't functioning properly.

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1. Plans are required to satisfy 410(b) each day  in plan year or on one day in each quarter, or on last day of plan year (1.410(b)-8). Per your facts, Catch22PGM, they would not pass for periods before 12/1 without aggregation, so I think you will want to aggregate for period before 12/1/2021. After 12/1 they can't be aggregated, since different employers.

2. If the plans satisfied coverage on 12/1/2021, including by aggregation, they should be good through 12/31/2022 as long as coverage not significantly changed. 410(b)(6)(C).

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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