Question 261: A bank holding company (which owns a bank 100%) becomes the sole owner of an insurance agency. Should the insurance agency be included in the bank's 401(k) plan? Currently the bank holding company won't even allow the insurance agency to start a separate plan.
Answer: Not necessarily. In responding to your question, I will refer to my book, Who's the Employer?. (Subscribers can click to view online the text of references to sections in the book.)
This is a classic parent-subsidiary controlled group. (See WTE 6:03.) The group includes a parent, such as the holding company, and all its subsidiaries. As such, all employees of any of the members of the group are deemed to be employed by a single employer for retirement plan purposes. (See WTE 10:01.) It does not matter that the bank itself does not own an interest in the insurance agency.
Does that fact answer your question? No. It merely tells us how to test for coverage and other issues.
Are the employees of the insurance company entitled to participate? Only if the plan document says so.
Is the plan document required to allow them to participate? Yes, if it is a standardized plan, a SEP or a SIMPLE. Otherwise (which means most of the time), the answer is no, so long as the plan can pass the coverage requirements of the Code without the insurance company employees. (See WTE 10:04.) Given the demographics of the typical bank, it would be extremely unusual for the plan to fail the coverage test, even taking the nonparticipating insurance company employees into account.
This question demonstrates a common misconception about the controlled group rules, and is one of the most common questions I receive. Many people do not understand the question that the controlled group rules are designed to answer. The rules don't answer, "who do I have to cover?" They don't answer, "What's my 415 limit?" They don't answer, "How do I run the ADP test in this situation." The questions the controlled group rules answer are, "Who are the employees of this employer?" and "Who is the employer(s) of this employee?" Having answered those questions, the rest of the qualified plan rules take over to resolve the other issues.
I'm absolutely delighted to announce that my employer, SunGard Corbel, will be sponsoring a series of half day workshops on Who's the Employer issues, where we'll be able to go into depth on questions like these. I'll be going around the country teaching them, as will my friends Stephen Forbes and Craig Hoffman. For information go to the SunGard Corbel seminar site and click on a listing for a seminar near you.