Benefit Elections Required?

[Dougsbpc]

Joe Smith is a dynamic guy and formed a corporation 40 years ago that acquires and manages apartment buildings. He is the 100% shareholder. They now have over 60 apartment buildings. They collect the rents, pay expenses etc. The corporation has about 50 full time employees.  The corporation (GLP, Inc.) has sponsored a 401(k) plan for about 25 years. Every year they make a 12% of salary contribution to all eligible employees and have for many years.

Joe is also quite the artist and has over 100 sculptures and other pieces of art. To show his art he bought a large 7,000 square foot house and formed a Tax Exempt entity called HSB that owns the property and employs 12 full time employees. It is very popular and gives 3 tours a day 5 days a week. Joe wanted HSB to sponsor the same type of 401(k) plan that GLP has for years. So a 401(k) plan with the same provisions was adopted for HSB 10 years ago and continues today.

I would think GLP and HSB would be related entities as Joe Smith owns 100% of GLP and has control of governance of HSB.

Question: Sometimes employees of GLP become employees of HSB and vice versa. If both entities are considered related, must former employees of GLP be provided full benefit elections if they are right away hired by HSB? Or can their GLP plan benefits simply be transferred to the HSB plan if both entities are considered related? 

Thanks.

 

[Bri]

If they're related, the employees would not have had a severance of employment with the (overall combined) sponsor, so benefit elections shouldn't typically be available.

[Peter Gulia]

Before either the business corporation or the charitable organization acts under an assumption that these together might be one I.R.C. § 414(b)-(c)-(m)-(o) employer, each might want its lawyer’s advice about whether that assumption is so.

If HSB obtained the Internal Revenue Service’s recognition of HSB as a charity, the application might have represented to the IRS that HSB had and would have multiple directors, trustees, or other governors. Further, HSB might have represented that some governors would be not subordinates of, and would be otherwise independent of, a substantial donor.

Among many sources of law, either lawyer might consider 26 C.F.R. § 1.414(c)-5 https://www.ecfr.gov/current/title-26/section-1.414(c)-5.

Consider that paragraph (c)’s tolerance for permissive aggregation might apply only among exempt organizations.

Are all or some of either GLP’s or HSB’s workers leased employees? Or arranged with a professional-employer organization? Or a payrolling company?

If GLP and HSB are not parts of one employer, might HSB consider becoming a participating employer of a multiple-employer plan?

These and many other questions might matter for the situation you describe.

This is not advice to anyone.

[bp parv]

3 hours ago, Dougsbpc said:

If both entities are considered related, must former employees of GLP be provided full benefit elections if they are right away hired by HSB? Or can their GLP plan benefits simply be transferred to the HSB plan if both entities are considered related? 

As wisely suggested by @Peter Gulia, you are assuming that Section 414 common control exists based on the statement that "Joe owns 100% of GLP, and Joe control of governance over HSB". I would not automatically assume that this creates §414(c) common control. The regulation speaks in terms of one organization controlling or being represented on the other organization's governing body. Common control by the same individual is not expressed as cleanly as the ordinary brother-sister ownership rules applicable to non-exempt entities. I would re-read the Treas. Regs and dig deep into the facts on this.

As further wisely suggested by @Peter Gulia, please make certain that you understand the service provider relationship to the applicable employer (i.e., PEO, leased employee, etc...)

Assuming the entities are in fact under Section 414 common control, and the service providers are common law employees, you state that "Sometimes employees of GLP become employees of HSB and vice versa." I take this to mean that the time period between being "called" an employee of GLP and HSB is fairly short (one day to one month). If so, I don't believe that there is a "severance from employment" allowing for a distribution from a qualified plan. Furthermore, the former GLP employee's account balance under the GLP plan is not automatically transferrable to the HSB plan.