ADP/ACP testing plan that becomes multiple employer mid-year

[Guest Jordan]

I would appreciate your thoughts on how to perform ADP and ACP testing for a plan that mid-year becomes a multiple employer plan. General scenario is a 401(k) plan with a matching contribution has 2 controlled group companies participating, parent and subsidiary. Mid-year the sub's stock is sold outside the controlled group but there is still a minority interest retained by the parent. The subsidiary's employees continue to participate in the plan for the rest of the year and likely for the next few plan years. This creates a multiple employer plan which is required to be disaggregated for 410(B) purposes (Question: as of when)?

Can the plan be ADP and ACP tested as a single plan for the rest of the plan year of the transaction or do the employees, their compensation and contributions have to be split of for recordkeeping and testing as of the date of the transaction? If they have to be split off, are they tested for the entire year as though they were a separate group or only from the date of the transaction on? Testing separately is a records nightmare. Does the fact that the 410(B)(6)© transition rule allows the parent plan to continue to satisfy 410(B) for the rest of the plan year (and the following year) provide an argument that you can continue to ADP/ACP test as a single plan during the transition period. Thanks for your comments.

[Guest PLHart]

We had similar situation and were advised by our legal counsel to test separately from the time the companies became separate controlled groups. In our case, one entity broke of from original controlled group beginning of 2Q, and two broke off on their own at beginning of 3Q. Therefore, we ended up with four testing entities.

The data that was included in each test had to include data for each company during the period in which it participated in the plan while it was a member of any other testing entity. For example, the test for the original controlled group consisted of data from original parent company fro all 4Q's, data from 1st spinoff company for 1Q only, and data from spinoffs 2 & 3 for 1Q and 2Q only.

Confusing but hopefully this will get you started in the right direction.

One other point! While your plan actually inadvertantly operated as a multiple employer plan during the plan year in question, if you did not restate your document to include the appropriate language required of such a plan, you most likely have a compliance issue since the plan operated differently from the doc (single employer). I would check on this issue as well.

I hope others on this Board may have some info for you as well perhaps with cites that I do not have.