Parent-Sub Controlled Group Issues

[Guest ELS]

I am trying to determine the implications of impelementing a 401(k) plan given the following circumstances:

1) Parent company owns 100% each of 42 separate companies.

2) My prospective client is one of the 42 wholly owned subsidiaries.

3) My prospective client wishes to implement their own 401(k)plan, independent of any of the other companies.

My question is whether all the employees of the 42 companies must treated as if they are employed by the parent company for qualification requirements, coverage, vesting, benefit/contribution limits, nondiscrimination, and top-heavy testing? I believe that a number of the other 41 companies have their own plans, and I do not get the impression that anyone is looking at all 42 companies as a whole.

Thanks for your help!

[pjkoehler]

In general, unless the subsidiary in question is a Qualified Separate Line of Business (QSLOB) under Code Sec. 414® and the regs, then all the employees of the Controlled Group will be treated as employed by a single employer for various purposes including minimum coverage requirements of Code Sec. 410(B). One of these requirements is that the sub have at least 50 employees for every day of the testing year who perform services exclusively for the sub.

It's probably fair to assume that if the sub is not a QSLOB, it will have to demonstrate that it satisfies the average benefit percentage test. Whether it does so on its own or aggregated with other plans of the controlled members will depend on a number of factors. You probably know that the portion of a plan consisting of 401(k) contributions must be disaggregated from the portion consisting of 401(m) contributions and from the portion consisting of employer nonelective contributions. So any "401(k) plan" is really with these characteristics is tested as 3 plans. It may be possible to aggregate the various portions of the plan with the analogous portions of the plans maintained by other controlled group members to demonstrate that the plans as a whole meet both the applicable nondiscrimination test (ADP, ACP or general test) and the minimum coverage test under 410(B). However, if the portions of sub's plan are tested separately for nondiscriminatory benefits purposes then they must also be tested separately for nondisriminatory coverage purposes. Code Sec. 401(k)(3)(A) and Treas. Reg. 1.401(k)-1(B)(3)(i) and (ii). Whether or not the sub's plan can will satisfy such testing is basically a number-crunching exercise, taking into account alternate testing methods, special transitional rules and data substantiation limitations.

As a general rule, it is not feasible for each member of the controlled group to engage its own TPA and design and operate its own plan. In a situation like yours, the nondiscrmination testing typically requires massive coordination of data. If, as the TPA, in the absence of a QSLOB situation, you are not also monitoring the nondisrimination testing of all the other members of the controlled group that maintain qualified plans, all of your nondisrimination testing may be for naught. So as a matter of scoping you're engagement, you should either limit your responsibility to administer the plan on the basis of a representation and warranty by the client that it is a QSLOB and bargain to all the plans in the group.[Edited by PJK on 08-28-2000 at 07:24 PM]