Usage of participation agreements

[TPAAdvisor]

The owner of an established construction company XYZ has a 401k plan with 75 employees, purchased car dealership A in 2019. In 2020 they purchased dealerships B & C. All were asset purchases, employees were considered new hires, eligible on first day of employment.

Dealership A started their 401k plan as a participating employer of XYZ plan as did B & C when they were purchased.

Assets of all of the plans were held with one recordkeeper, using separate divisions for XYZ, A, B & C.

Each plan was tested separately and a 5500-SF was filed for each division, using their separate business plan names and TINs 2019 to present.

Due to attribution rules, owner owns more than 50% of each business, making it a controlled group.

What issues are present in this situation?

[rocknrolls2]

TPA Advisor, There are regulations at Section 1.414(l)-1 that describe situations when the IRS considers that there is one plan or more than one plan for purposes of the requirements for mergers, consolidations or spinoffs of plans that also generally apply for purposes of Form 5500 filing and certain other purposes. Under the facts that you describe, It seems that there is one pool of plan assets under the XYZ plan for XYZ and A, B and C. Therefore, there is only officially a single plan, even if there are separate plan documents. If all the relevant provisions of the separate plan documents are identical or nearly so in terms of eligibility, vesting, types of contributions, etc., there should be a single plan for purposes of coverage and nondiscrimination testing as well as all other qualification requirements. I know that the DOL recently revised their regulations for purposes of the audit requirement on who is counted for purposes of the 100-participant minimum requirement for an audit to accompany the Form 5500. You should consult those rules to determine whether the DOL would consider the XYZ plan for all entities would constitute a single plan for purposes of the audit requirement. If you do not do so, you may be getting a letter from DOL suggesting that the plan is a single plan for this purpose and that you need to file a full-scale 5500 and include an auditor's report.

If there is no issue of whether there is a single plan or four plans (meaning that you can treat the plans as separate for plan qualification and DOL purposes), then coverage and nondiscrimination testing would be conducted using the employees who are eligible under the plan being tested in the numerator and the total number of eligible employees in the controlled group in the denominator for ratio percentage testing under coverage. If the material provisions of the plan are identical or nearly so, then there should still be no issue with passing coverage testing (in fact, you can permissively aggregate the plans, if need be, to  meet coverage). Things could get more dicey is one or more of the plans are safe harbor and one or more of the remaining plans require ADP/ACP testing, for nondiscrimination testing purposes. 

However, the bottom line is that you should focus on retaining competent counsel to determine whether there is a single plan or four plans based on the IRS regulations and the DOL's audit requirement regulations. It may be necessary to make corrective Form 5500 filings to correct any error or to consider a voluntary compliance filing under EPCRS to merge plans if you should have maintained a single plan based on these facts -- alternatively, you could propose to amend the plans retroactively to separate the assets of each "plan" based on the their actual operation. While you can sometimes do that on a self-correction basis, you should consult the IRS Notice that was released earlier this year to determine whether the IRS will allow you to self-correct for this or whether a voluntary compliance filing would be required.

[truphao]

without diving into overall complexity I think it boils down to having 1 plan or several plans.   On a surface this smells like it is/should have been a single plan.  If so, then you might be facing incorrect prior years' testings and inappropriate F5500 filings.  Then, it becomes a question regarding what is the best way to correct.  You should retain a knowledgeable service provider to at least evelaute the proper course of action.

[Artie M]

You have asked a bar question...spot the issues.  That said, your threshold issue is whether there is a controlled group.  You state that "Due to attribution rules, owner owns more than 50% of each business, making it a controlled group."  That is not an accurate statement.  In very simple terms (perhaps oversimplified), a controlled group can exist where one entity (a parent entity), either directly or indirectly, owns at least 80% of another entity (a subsidiary entity).  It also can exist when 5 or fewer individuals own at least 80% of multiple businesses (possible brothers-sisters) and the overlapping ownership interests between the entities is at least 50%.  Your facts don't reach the parent controlled group standard, and, though the overlapping interest in each entity appears to be at least 50%, it is uncertain if 5 or fewer individuals own at least 80% of each business.  Even if there is no controlled group under the parent/brother-sister rules, it is still possible there could be an affiliated service group, which would require the entitles to be treated as a single employer. 

Also, note that there is no prohibition against non-controlled groups adopting and maintaining the same plan.  In such a case, the testing would be separate but the number of filings would depend:  if all plan assets are available for the benefit of all employees under the plan, only a single Form 5500 needs to be filed; but if the assets attributable to separate employers are available for the benefit of only that employer’s employees, each separate participating employer may have to file a separate Form 5500.  Also, there is no prohibition against controlled group members adopting different plans. Again, this is a testing issue.  If each group can satisfy 410(b) coverage testing on their own, they can have separate plans even though other nondiscrimination testing must be done on a collective controlled group basis.  So, conceivably, they could have separate plans with separate 5500s.  Of course, if they are in a controlled group it is likely they should not have filed a 5500SF but that depends on the number of employees in the controlled group.  You have not provided that information.  

Bottom line is you need to know whether it is actual controlled group or not