Question 283: Corporation A sponsors a qualified plan that excludes the employees of Corporation B (a member of the controlled group with A coporation) from participation. Do the employees of B count against the plan in coverage testing, even if they have not completed the Year of Service required by the plan?
Answer: No. Let's work through this carefully.

Because A and B are in a controlled group, they are considered a single employer for many purposes, including the 410(b) coverage requirements. It's as if all employees of B are employees of A. For purposes of the coverage test, it doesn't matter which of the two companies the employee works for.

Code section 410(b)(4) excludes from the coverage test any employees who fail to satisfy the plan's minimum age and service requirements or who haven't passed the plan's entry date. Because the plan doesn't allow an employee who lacks a Year of Service to participate, all employees who lack a Year of Service are excludable employees. This applies with equal force to the employees of A and the employees of B.

So, while the B employees who would satisfy the minimum age and service requirements count in testing coverage, the employees who don't satisfy those requirements are out of the test, regardless of who they work for.

It's questions like this one that prompted me to vastly expand the discussion of the consequences of controlled group status in the upcoming 4th edition of Who's the Employer. It includes a whole chapter discussing the coverage rules, with many examples focusing on the peculiarities of controlled group situations. To preorder your copy, at a 15% discount, visit my online order page.

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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.

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