One owner, 2 companies - prorate the $170,000 comp limit?

[MR]

Here's what I think is an easy one, but I want to make sure. You have an owner of two car dealerships, each with its own plan. They pass coverage. They are a controlled group. The owner has pay of about $600K in one and about $75K in the other (both LLC's). I think we must prorate the $170,000 pay limit between the two plans. I further think we would prorate it based on the total pay from both companies. In other words, 600/675 X 170,000 = pay in company 1 and 75/675 X 170,000 = pay in company 2. Agree? Disagree?

[Richard Anderson]

Disagee. $170,000 limit in one, $75,000 in other.

[Bill Berke]

He's treated as employed by one company, so I would say he has 170,000 of income - 95,000 from one and 75,000 from the other.

[MR]

Richard, how could you use more than $170,000 when its a controlled group? I think, using either our method or Bill's, you have to prorate to a total of 170.

[Guest Hans Moleman]

On what basis would you have to prorate the compensation? The 415 limits will be aggregated. I agree with Richard's analysis.

[MR]

ok, lets use an example.

If there's a 5% of pay contribution for both plans, the owner would receive $8,500 in one and $3,750 in the other. In effect, he'd be getting a total of $12,250, or 7.2% of the maximum allowable pay, while everyone else gets 5%. If the 2 companies were in the same plan, you'd limit the guy to 170k, so why would it be different with 2 plans?

[Guest Hans Moleman]

I disagree. Your analysis is based on aggregating the plans for coverage and nondiscrimination testing. Is that the case?

Otherwise, with the plans being separate, the owner gets 5% in both plans just like everyone else.

[Bill Berke]

I agree with MR. If we used Richard's analysis (170,000 and 75,000) I would/could be using comp in excess of the limit. This is a controlled group - the plans are treated as one plan for all 401(a) limitation purposes. I agree with MR that using Richard's analysis could get you to the 7.2% TOTAL contribution even though each plan was at 5% because you would be using too much comp (170,000 plus 75,000=$245,000). 5% of 245,000 ($12,250) is 7.2% of the $170,000 limit - the accidental result of Richard's analysis

[Richard Anderson]

Now, I disagree with myself. I was wrong. Compensation in a control or ASG must be aggregated. I think MR's method of pro rating the 170,000 between employers seems logical.

[Bill Berke]

A question regarding whether to prorate. Suppose we are dealing with a NHCE because we use top 20% - (bear with me and ignore ownership HCE in MR's case) - with comp of 75,000 and 170,000. Using MR's proration logic, I would not be using/including all that NHCEs comp (75,000) in the first plan because of the proration calculation. While I do not know who/what is correct, it is because of this situation (and we have a few) that I do not prorate unless I have the really unique (never encountered) situation where both sources of comp (as stand alone issues) would result in problem, e.g. 130,000 and 170,000. All thoughts are welcomed.

[Everett Moreland]

The 401(a)(17) limit applies for purposes of allocations and nondiscrimination testing.

As to nondiscrimination testing, 1.401(a)(17)-1©(3) states that the 401(a)(17) limit applies separately to each plan: "Plan-by-plan limit. For purposes of this paragraph ©, the annual compensation limit applies separately to each plan (or group of plans treated as a single plan) of an employer for purposes of the applicable nondiscrimination requirement. For this purpose, the plans included in the testing group taken into account in determining whether the average benefit percentage test of section 1.410(B)-5 is satisfied are generally treated as a single plan."

If you read 401(a)(17), 1.401(a)(17)-1(a) and (B), 1.410(B)-7(a) and (B), and 1.414(l)-1(B)(1), I think you will conclude that for allocation purposes the 401(a)(17) limit also applies separately to each plan.

Permissive aggregation of two plans for nondiscrimination testing does not make them one plan for allocation purposes, even if maintained by the same controlled group.

If the two LLCs in fact have only one plan under the rules in 1.410(B)-7(a) and (B) and 1.414(l)-1(B)(1), the two plans would be treated as one plan for purposes of applying the 401(a)(17) limit to both allocations and nondiscrimination testing. However, my guess is that the 401(a)(17) limit still would not be prorated between the two plans for allocation purposes. My guess is that the aggregated plan would be treated as making only one allocation for the owner (the aggregate of the two allocations), and thus the allocation would not be based on compensation over the 401(a)(17) limit.

If the plans fail nondiscrimination testing because the 401(a)(17) limit is not prorated for allocation purposes, you would want to provide a method for prorating the 401(a)(17) limit for allocation purposes. The method of proration would need to be stated in the plan documents. Otherwise the plans would not have a definite allocation formula (if they are profit sharing plans) or provide definitely determinable benefits (if they are money purchase plans).