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Answers are provided by S. Derrin Watson, JD, APM
EGTRRA and Controlled Groups
(Posted July 10, 2002)
Question 212: In discussing the upcoming third edition of your book, you mention that it describes EGTRRA-related changes to the controlled group rules. What are they?
Answer: EGTRRA does not directly change how controlled groups or affiliated service groups are determined. However, in several ways it changes how controlled group rules are applied, or applies them to new situations:
In addition, the EGTRRA committee reports make a fascinating side note about groups under common control and household employees. I will discuss that in a future Q&A in this column.
- The catch-up rules refer to controlled or affiliated groups twice:
- First, they say that if any group member accepts catch-ups, all members of that group must do so for their applicable plans. The IRS has said that as long as all group members implement the rules by October 1, that's fine, but apparently the rules thereafter would need to be implemented by all group members simultaneously (regardless of plan years).
- Second, the technical corrections to EGTRRA make it clear that all qualified plans, 403(b) plans, SEPs and SIMPLEs sponsored by controlled group members are considered a single plan for purposes of applying the overall catch up limits ($1,000 this year).
- The new credit for small plan start-up costs is computed on a controlled group basis. That means a single $500/year credit applies to the group as a whole. It also means that all related employers are aggregated in determining if the employer is eligible (i.e., if the employer has no more than 100 employees with at least $5,000 in compensation).
- The change in deduction rules moderates the harshness of affiliated service group members having separate deduction limits. But it creates new problems of its own, especially for employers using cross-tested designs to maximize contributions for owners who are below the $200,000 compensation limit.
The key point to remember is that the controlled group, common control and affiliated service group rules are an integral part of the retirement plan framework. They are a basic part of determining who is treated as an employee. Thus, whenever there are major changes in that framework, the controlled group rules are woven into the changes.
A good example is the change in the 401(k) distribution rules to permit distribution on severence of employment. Congress did not particularly consider how that standard would be applied in a controlled group situation. Fortunately, the IRS did give us guidance in Notice 2002-4 to show how the controlled group rules relate to the severence of employment rules.
Another example is EGTRRA section 620, which exempts new plans of small employers from user fees on determination letter requests. That section never mentions the controlled group rules. But it refers to IRC 408(p)(2)(C) to determine if an employer is eligible because it has no more than 100 employees. Because the SIMPLE IRC 408(p) rules are determined with regard to aggregation under IRC sections 414(b), (c), or (m), all related employers are treated as a single employer in determining whether the sponsor is eligible for the user fee waiver. You don't have to mention the controlled group rules for them to have an important impact.
The third edition of Who's the Employer will cover these changes and much, much more.
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