Question 256: A and B, which are members of a controlled group, each sponsors a plan that covers only employees who work for the sponsoring company. If Employee X works 600 hours for A and makes $12,000 and 500 hours for B and makes $11,000, is X in both plans, assuming each plan has a 1-year service requirement? What is the deductible contribution for X in each plan and what compensation is used for allocation purposes in each plan?
Answer: DOL and IRS regulations give us very specific answers to your questions.
The regulatory answers conform to the general philosophy of Internal Revenue Code section 414(b), namely that all employees of controlled group members are deemed to be employed by a single employer. WTE 10:01. I will be referring throughout to my book, Who's the Employer?. (Subscribers can click to view online the text of those references.)

If A and B really were a single employer, would there be any doubt in your mind about crediting hours of service? I hope not. You would count them all.

For example, suppose I work in both the accounting department and the shipping department of a large company. The company's plan says that only persons who are employed in the shipping department are eligible to participate in the plan. Suppose I only have 250 hours in the shipping department, but I have 800 hours in the accounting department. The plan requires 1,000 hours of service. Do I have 1,000 hours? You bet. Am I employed in the shipping department? Yes. So I am entitled to enter the plan.

Could the plan expressly provide that only hours in the shipping department count? No. Any attempt to do so would violate IRC 410(a) because it would have the effect of requiring service for the employer in excess of 1,000 hours.

The same logic applies to a controlled group situation. WTE 10:10. It does not matter whether the employee is highly compensated or not. Here is an excerpt from the DOL regulations:

[I]n determining an employee's service for eligibility to participate and vesting purposes, all service with any employer which is a member of the controlled group of corporations shall be taken into account. . . . [I]n determining a participant's service for benefit accrual purposes, all service during periods of participation covered under the plan with any employer which is a member of the controlled group of corporations shall be taken into account. [29 CFR 2530.210(d).]
What compensation is used for allocation purposes? Use whatever compensation the plan sets forth. But in testing whether the result is nondiscriminatory, you must count all compensation from all controlled group members. WTE 10:11. In other words, a plan certainly can limit compensation for allocation purposes to compensation paid by Company A, but that would not be a a safe harbor definition of compensation-- so it must use a "nondiscriminatory" definition (which would include compensation from both A and B) in applying the compensation ratio test or the general nondiscrimination test. See Reg. �1.415-2(d)(6).

Deduction limits are another matter. If each company sponsors its own plan, then each company computes its deduction limit separately, as though a controlled group did not exist. The companies have a joint limit only if they jointly sponsor a plan. WTE 10:17.

Important notice:

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 or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.