Retirement Plan Consultant
Cetera Retirement Plan Specialists
Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
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|Question 332: At the ASPPA regional conferences this year, a slide said "Can controlled group members pass coverage separately? If yes, each may have its own plan with different provisions. If no, then they must be in the same plan or mirror plans." I'm told you had concerns about the wording of that slide. So, what's the problem?|
Frequently, PowerPoint slides give us a condensed version but don't tell the whole story. That is left to the instructor. So, let's lay out more of the story.
Sometimes, passing coverage is the only real challenge a plan faces. In my examples, companies A and B are in a controlled group and A sponsors a plan for its employees. Suppose A sponsors a safe harbor 401(k) plan with a 3% nonelective contribution based on total compensation for the plan year. The deferrals are immune from the ADP test and the nonelective contributions enjoy the benefit of their own safe harbor. The key issue for the plan is being able to pass coverage without covering the B employees.
Compare that situation with the cross-tested plan discussed in Q&A 331. It isn't enough that the cross-tested plan satisfies coverage considering the employees of B; it must also take those employees into account in the cross-testing analysis. Just because a plan passes coverage does not mean it passes nondiscrimination. Many people think the controlled group rules mandate that a single plan cover all related employers, or that they must be in mirror plans. This is a very common misconception. However, the related employer rules make no such requirement. Rather, the rules insist that each qualified plan (as defined for coverage purposes) passes coverage, nondiscrimination, and minimum participation (and more!) by counting all nonexcludable employees of related employers.
Putting everyone in the same plan is frequently a cost-effective method of doing exactly that, and is often both the simplest and the best strategy. Using mirror plans can be effective as well, particularly if combining the employees into a single plan would take the plan over the audit threshold. The employer can, if needed, easily aggregate the plans for coverage and nondiscrimination testing if the plans have the same plan year and do their testing the same way. The task of testing the aggregated plan is made simpler if the two related plans have the same benefits, rights, and features (including investment choices), eligibility options, etc.
But there are other ways to pass testing. Suppose A has a cross-tested safe harbor 401(k) plan, and B has an ADP-tested plan with a discretionary profit sharing contribution. Assume the A plan fails coverage because the plan fails the average benefit percentage test. Depending on the facts, making an additional contribution to NHCEs in one plan or the other could be the least expensive way to solve the problem. An alternative approach may involve bringing a few selected employees from the B plan into the A plan. There is no reason to abandon the disparate plan designs unless the employer wishes to do so.
If defined benefit plans are involved, the minimum participation rules add another hurdle. Suppose companies A, B, and C are related and each has 2 HCEs and 8 NHCEs. If A sponsors a defined benefit plan covering all the employees of A, the plan should pass coverage and nondiscrimination whether testing A alone, or testing all three employers together. But the plan will fail the minimum participation requirements of Code §401(a)(26), because it does not cover 40% of all nonexcludable employees of all related employers.
The controlled group rules do not compel mirror plans or combined plans. The rules simply tell us that all employees of all related employers are deemed to be employed by a single employer for most purposes, including coverage, nondiscrimination, and minimum participation. That leaves a lot of a latitude for the creative practitioner.
My book, Who's the Employer, devotes several chapters to discussing the effects of related employer status. Those effects are far reaching and involved and defy easy summary on a single PowerPoint slide.
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.