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Filing for Midyear Changes in Controlled Group Status
(Posted September 8, 2001)
Question 125: Parent Company sells one of its subsidiary companies, Company B, in a stock sale on November 15, 2000. Company B continues as a participating employer in Parent Plan until March 1, 2001 when it establishes its own Plan and a transfer of assets from Parent Plan to new Company B Plan occurs thereafter. Parent Plan realizes it needs to be treated as a Multiple Employer Plan for January 1, 2001 - February 28, 2001. The question is whether it is also a Multiple Employer Plan from November 15, 2000 - December 31, 2000, or may it continue as a controlled group plan for 5500 reporting and testing purposes through December 31, 2000 by treating Company B as an additional component member of the group for the entire 2000 Plan Year under rules akin to the additional component member rules of Code Section 1563(b)(3)?
Answer: IRC 1563(b) contains several important rules to make the controlled group system more rational and easier to administer. These rules say that if you are in a group for half a year, you are a component member of the group for the whole year. They also remove foreign corporations as component members of controlled groups, and effectively eliminate overlapping groups.
And none of those rules apply for qualified plan purposes. None of them.
Why? IRC 414(b) refers to members of a controlled group, not to component members. 414(b) only changes component member status, which is used for normal income tax returns and not for qualified plans. The regulations confirm this:
That's what the law is, and it is quite clear. Unfortunately, the regulations have been less than specific about what to do when you have midyear shifts in controlled group status. The 5500 instructions are completely silent on the point.
For purposes of this section, the term "members of a controlled group" means two or more corporations connected through stock ownership described in section 1563(a) (1), (2), or (3), whether or not such corporations are "component members of a controlled group" within the meaning of section 1563(b). Two or more corporations are members of a controlled group at any time such corporations meet the requirements of section 1563(a) (as modified by this paragraph). [Emphasis added.]
Fortunately, it should not be much of an issue here. The only difference between filing for a multiple employer plan and a single employer plan is that you must file an extra Schedule T to show testing for IRC 410(b). That extra schedule T for the two months in question should be quite easy to fill out, because the plan should qualify for the free pass of IRC 410(b)(6)(C). Fill out the front page, check box 3e, and it's done.
Of course, having said that you have a free pass of IRC 410(b), that does not mean you have a free pass for IRC 401(a)(4). Technically, for the two month period, the two must be tested separately. I know of no guidance on how this is to be done. Make a reasonable choice and it is unlikely you will be challenged.
The component member rules are discussed in Chapter 9 of my book, Who's the Employer?. Changes in status are discussed in Chapter 11.
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