"Standardized" Adoption Agreement and Controlled Group

[PMC]

Employer A has a 401(k) with employee deferrals only and it's on a Standardized Adoption Agreement, calendar year/plan year.

Employer B also has a 401(k) with an Employer Match and is on a Standardized Adoption Agreement, calendar year/plan year.

Last quarter of year 2000, A and B become a controlled group but nothing was done to either Plan before the transaction to exclude the other Employer and utilize the 410(B)(6)© transitional rule. So as written, on the date of the transaction Employer A's Plan should have covered employees of B and vice versa.

The transitional rule is allowed if the coverage under the plan is not significantly changed during the transition period (other than by reason of the change in members of a group)...

Rev. Proc. 2000-20 now allows Standardized Plans to use the transitional rule.

Do you think each Plan could

1. "automatically" apply the transitional rule without an amendment excluding the other employer,

2. use the transitional rule but amend each plan to exclude the other entity, or

3. not be able to use the transitional rule even by amending each plan because the plan isn't written to exclude employees thos employees and an amendment now could be viewed as significantly changing the coverage.

Incidentally, their intent is to merge both plans mid-2001.

[Bob R]

For whatever it's worth, I think 3 is the correct answer. There is nothing permitting you to disregard the terms of the plan. And, an amendment now would, in my opinion, be considered a significant change in the coverage.

If both plans require 1 year of service as a condition of eligibility, then you might be in good shape. The reason is because I think service for both companies only needs to be taken into account after the date they became a controlled group. For example, employees of B will only be eligible under A's plan if they have 1 year of service. But, B didn't actually adopt A's plan so I would argue that they won't have a year of service for purposes of A's plan until they been employed as part of the controlled group for one year.

[Medusa]

Recently I had a situation with an affiliated service group consisting of 9 individually incorporated physicians and another corporation employing all the staff. Each physician was supposed to establish their own money purchase plan with provisions identical to those of the staff plan. I had told them not to use a standardized prototype, but some of them came back with standardized prototypes anyway. I was expecting to see that these prototypes would automatically cover all members of the affiliated service group. A couple did, but a couple were worded such that they only covered the adopting employer. I assume that in such a case, the end result is simply that it is kicked out of standardized prototype status and into individually designed status?

[Bob R]

Whether they have individually desgined plans depends on the language in the prototype plan. If the prototype plan was approved by the IRS and it doesn't automatically cover all members of the controlled group or affiliated service group, then it was mistake on the part of the IRS. But, adopting employers are generally able to rely on the terms of the prototype as approved. Thus, just because the IRS made a mistake doesn't mean the adopting employers have an individually designed plan. They are just following the terms of the plan as approved.

[PMC]

Bob - don't think looking at the year of service requirement would work here since their intent is to merge the 2 plans anyway and years would have to be credited.

But you think that even though the actual "creation" of the controlled group didn't occur until year 2000, the Plan can't default to Rev. Proc. 2000-20 and utilize the transitional rule?

[Bob R]

I don't think you can use Rev. Proc. 2000-20. All it states is that standardized plans can be designed to use the 410(B)(6)© transition rule. But, it's not automatic. And, since this isn't a change being made due to a GUST change in the law (nor is it integrally related to any GUST change in the law), I don't know of any authority to disregard the terms of the plan. In other words, this isn't something that you can apply in operation and then retroactively amend the plan at a later date.