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Answers are provided by S. Derrin Watson, JD, APM
Change in Status and Top Heavy Minimums
(Posted July 17, 2002)
Question 215: Company A, with one HCE and no NHCEs, has an overfunded defined benefit plan with a June 30 fiscal year. Company B has one NHCE and one HCE. We recently discovered that A and B were part of a controlled group from 1998 until May 1, 2002. Under the terms of A's plan, B's NHCE will need to accrue a top-heavy minimum benefit. Will the two corporations be treated as a controlled group for all of 2002 because a controlled group existed for part of the year (Jan. 1 through May 1)? Company B has never cosponsored the plan.
Answer: No. You may be confusing the controlled group rules for retirement plans with the rules for income taxes.
For income tax purposes, if two corporations are component members of a controlled group on a particular December 31, then they share one set of income tax brackets for the fiscal years that include the December 31. If a company was not part of the group for half the days in its fiscal year preceeding the December 31, then it is excluded from being a component member of the group for that year.
For example, suppose Acme Corp becomes part of a controlled group September 1, 2002. Acme has an April 30 fiscal year. There are 244 days from May 1 to December 30, inclusive, and Acme will be part of a controlled group for 121 of them. That is less than half of 244, so Acme is excluded from being a component member of the group on December 31, 2002. For additional examples, see chapter 9 of my book, Who's the Employer.
By contrast, for retirement plan purposes, the component member rules are completely disregarded. The regulations are very specific (and very accurate) in their description:
Take another look at that last sentence and ponder on those words "at any time." To me, that means controlled group status is determined on a day-by-day basis for retirement plan purposes.
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).
Let's apply the regulation to your situation. The two companies are certainly not a controlled group for retirement plan purposes for the 2002 calendar year. Rather, they are a controlled group from 1998 until May 1, 2002.
What does that mean for the NHCE? That means he was deemed to be an employee of the plan sponsor until May 1. If he was credited with 1,000 or more hours of service between the start of the plan year on July 1, 2001 and May 1, 2002, he is entitled to a top-heavy minimum benefit. Is he entitled to a benefit for the 2002-2003 plan year? Of course not. At no point during that year is he deeemed to be an employee of the sponsor.
This is just one of the testing issues that arise in dealing with changes in controlled group status. Organizational changes also can profoundly affect ADP testing, eligibility, vesting, and other benefit accrual issues. (The third edition of Who's the Employer addresses these issues in much greater detail than previous editions.)
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice
to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the
law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness
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