Farmer's Cooperatives Sponsoring 401(k) Plans

[Guest stan]

Can a Section 521 entity (farmer's cooperative) sponsor a 401(k) plan for its members? If so, where can I find the IRC authority to do so? Thanks.

[BeckyMiller]

IRC Section 401(k)(1) refers to plans sponsored by "rural cooperatives" as being covered by its provisions. But this is a very narrow concept covering electric companies, irrigation districts, etc. See IRC Section 401(k)(7). This would not include your typical farmer's cooperative.

However, IRC Sectin 401(k)(4)(B) discusses the eligibility of tax-exempt entities to offer such a plan. It provides that any entity exempt under this subtitle can include a 401(k) plan as a part of a plan offered by it.

So - yes you can.

[Guest stan]

Thanks. How would this work with respect to referrals? Would the plan be a "single employer" plan and would a farmer/member be able to defer from coop payments? Or would the plan be a multiple employer plan with each farmer sponsoring his/her own plan under the umbrella of the farmer's coop? My understanding of a farmer's coop is that the farmers are not employees of the coop but rather members who receive payment for product, but not necessarily services to the coop.

[BeckyMiller]

Ah - sorry I focused on the issue of its semi-exempt status and not on the coverage of members.

You are right, the Co-op sponsoring the plan would be sponsoring it for the common-law employees of the co-op. To the extent that you want to make a vehicle available that would let the farmer's sponsor a plan with many of the features of a larger employer plan, you would end up with a multiple employer plan. Because of the one member - one vote that is a requirement of a coop. it is extremely unlikely that you would ever end up with a controlled group arrangment.

That means that the farmers get the advantage of the cost sharing, but each farmer would be considered to sponsor his or her own plan. We see arrangements with credit unions, where they have a master plan for all the credit unions and then each separate credit union covers its own employees. In the credit union world, we have seen the separate credit unions delegate the "Plan Administrator" duty to the lead organization. That enables that entity to execute most of the required amendments to retain qualified status without having each adopting entity sign off.

As long as each member's contributions go just to that member or their employees, the nondiscrimination testing would be done on a member by member basis and not in aggregate. (I wouldn't think you would want to have it aggregated.)

The filing rules for such an arrangement are described in the instructions to Form 5500.

I don't know that I would recommend such an offering by a farmer's cooperative. The separate calculations of net self-employment income for each member may be so complicated that the coop's accounting staff may find themselves more involved in their member's tax situations than they would like to be. Since each farmer can maintain a regular SEP with full annual discretion on their own contributions and no annual filings, it seems that approach would be simpler. Obviously, that approach may not be attractive if most of your members have common-law employees that would have to be covered.

[Guest stan]

Thank you. I, too, could not figure out a way that the cooperative could sponsor a single employer plan for the farmer members.