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Secure 2.0 Marital - No longer CG rule


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Husband and Wife were considered control group under pre-secure 2.0 due to both minor child and community property state. They would meet the non-involvement in each others business and are no longer CG as of 1/1/2024. At least that is my understanding.

They both sponsored a single DB through 12/31/2023.

Wife would like to discontinue her participation in the Plan and execute a rollover distribution to IRA (with spousal consent).

Wife will continue business, though income for 2023 was $0 and no W-2 was paid to wife's corp.

Husband is sole employee of husband's sole-prop, Wife is sole employee of wife's corp and is 100% owner of wife's corp.

Can she terminate participation in DB Plan and effect a rollover? Plan is well funded.

Does she need to spin off to a new DB plan in wife corp name and then terminate?

My understanding is she in not terminating service which would make things easier, the business is just currently not profitable.

Wife is too young for in-service distribution and does not meet definition of NRA.

Alternatively can her corp end participation in the DB Plan but she remain a terminated vested participant in the the Plan?

If she remains a terminated vested participant in the Plan, would the Plan now require PBGC coverage?

Has anyone reviewed how the 410(b) transition applies to plans dropping out of CG status due to secure 2.0 change?

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If the wife’s corporation and the husband’s sole-proprietor business no longer are commonly controlled and otherwise are not parts of one employer under the several subsections of Internal Revenue Code § 414, is there any impediment to a spin-off plan taking on the obligations to the wife and getting a fair portion of the transferor plan’s assets?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Other than the cost of spinning off the Plan into a new plan and then immediately terminating it, there is no real impediment. We are looking at options to avoid that as the wife's benefit is quite small in relation to the Husbands. The Wife honestly would not have had any DB plan except for the fact that they were a CG and it would not have passed 401(a)(26) without her participation since they are the only two employees of what was a CG prior to Secure 2.0.

Since the wife's business is currently unprofitable as she has scaled way back, it's unclear if her corp would have the income to offset and deduct the cost of a new spun off DB plan and termination. Though ideally I think that is the cleanest and best way to proceed.

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I think a spin-off is likely the best way to go. Subsequent termination should be looked at through all the facts and circumstances with respect to consideration of permanency, on which we've had many discussions in this forum. If her benefit is small, would her spun off plan have an EZ requirement? Yes, there is required actuarial work even if frozen, so keeping around not likely worth it.

I don't know if her withdrawal as a participating employer is a termination or distributable event. She is no longer employed by an employer sponsoring the plan, so maybe. If she left benefit in plan as TVR then yes, I think that could trigger PBGC coverage.

I haven't seen this at the micro level, is there a 5310-A filing requirement or are these exempt?

410(b) transition rules were crafted in the context of transactions that altered control groups rather than law changes, so maybe need some guidance (unless there was some in the recent notice).

 

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Look at the plan document to ascertain whether there is any distributable event.  As implied in above responses (and in original post), it seems unlikely; thus, the recommendation to do a spinoff.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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