Problems with having the two plans invested in a single group annuity

[Guest]

401(k) Plan has 140 participants as of 1/1/2000 and as of 9/30/2000. Client wishes to split plan into two plans (one plan for each of company's two divisions) as of 12/1/2000. Each plan would then have 70 participants.

Clearly a CPA audit of Form 5500 is still required for 2000 Plan Year. I believe that a CPA audit would not be required for the two new plans years beginning 1/1/2001, since each of the new plans would have less than 100 participants as of the first day of the plan years.

Plan participants have daily valued investments with a national insurance company's group annuity product. To obtain better expenses/prices the client would like to maintain the plans in one contract with the insurance company's records.

TPA receives electronic download from insurance company and can produce separate plan level and participant statements on a divisional basis. This is easy since the investments are valued daily.

New plans will be identical in provisions. Only difference will be plan name.

Question: Are there problems with having the two plans investments in one contract? Does this create a common collective trust and additional reporting requirements?

[Kristina]

A common collective trust is when unrelated plans invest in the trust. I believe your issue is whether you have a master trust situation, but since the financial reporting for a Master Trust requires reporting the plan's share of the underlying assets, there would be no additional reporting.

A better question is, Does (or Do) the plan(s) Trust Agreement(s) provide for the comingling of assets with another plan? Who will be the Trustees of the Plans, a common Trustee or different for each Plan?

Since you already have a Group Annuity contract, having a plan split off as a separate plan adopting the same contract raises no difficulties in filing except for keeping track how much of the assets, income, expenses, etc belong to each plan. It is unlikely the insurance company will do that for you. You will still have the Sch D and financial statements to complete for each plan.