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Lack of Data Yields Lack of Answers
(Posted October 15, 2004)
Question 269: Individual owns 100% of company A and participates in company A's retirement plan as an employee of company A. Individual is 40% owner of company B. Can company B adopt a retirement plan that is different from the retirement plan adopted by Company A? If so, can the individual participate company B's retirement plan?
Answer: Every now and then, I like to post a question like this to demonstrate the questions practitioners need to ask and the answers the controlled group rules give. In explaining the situation, 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.)
40% common ownership does not begin to create a controlled group. A brother-sister controlled group of two corporations requires, among other things, that the same 5 or fewer individuals, estates or trusts own at least 80% of each corporation. (See WTE 06:05.) 79% common ownership won't do it, so 40% won't either.
But, of course, this assumes that the individual owns only 40%. We need to make sure he doesn't own any stock by attribution (and that no B shareholder is deemed to own his A stock). (See WTE Chapter 7.) To be really thorough, we check the exclusion rules as well. (See WTE Chapter 8.)
Once we rule those out, are we done? No, because we still need to address the affiliated service group rules. The individual's ownership isn't enough to trigger a controlled group, but it can be more than enough to trigger an affiliated service group ("ASG"), depending on the facts. But the question does not include facts that would let you determine whether an ASG exists. (See WTE Chapter 13.)
Now, suppose for just a moment this is an ASG. Would that preclude B from adopting its own plan? No, so long as it can pass coverage. The controlled group/ASG rules simply tell us that two businesses are a single employer. They leave it to the coverage rules to answer questions about separate plans. To apply those rules, we need to know the employee data from both companies so we can properly apply the tests. If it is not in a controlled group/ASG with A, nothing prevents B from adopting its own plan. (See WTE Chapter 10.)
If B adopts its own plan, can the individual participate? Of course he can, if he is an employee (or deemed to be an employee) of B. If the businesses are treated as a single entity, then there is a single 415 limit. If they are separate employers under 414(b), (c), and (m), and each sponsors a defined contribution plan, then he could have a $41,000 annual addition in the A plan in 2004 and a $41,000 annual addition in the B plan.
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