NQ Client Services Manager (Private Label) (Lake Mary FL / Dallas TX)
Associate Attorney - Tax (Honolulu HI)
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|Question 347: What's the rule for counting service prior to becoming a member of related group?|
Count it. That's as simple as it gets.
There are folks who disagree with me on this, so let's take a moment and see if we can't narrow our disagreement. Let me provide an example we can analyze:
Sandy has worked for SubCo since 2014. December 31, 2017, she has 4 years of vesting service in the SubCo 401(k) plan, which has an employer matching contribution.
January 2, 2018, ParentCo buys 100% of the stock of SubCo, therefore forming a controlled group. Parker has worked many years for ParentCo and participates in the ParentCo 401(k) plan. The ParentCo plan requires one year of service and allows entry on January 1 and July 1. Prior to the transaction, the ParentCo plan covers only the employees on the ParentCo payroll.
With these facts, consider the following questions and scenarios: When I discuss disregarding service, I refer to service before the January 2, 2018 acquisition.
Now we've come to the heart of the matter. For #7, I say ParentCo must count the prior service because of the related employer rules, while others disagree with me. But I think it's important to realize how narrow this disagreement is and how rare it should be.
Situation #7 is a fairly unwise. If SubCo does not cosponsor the plan, ParentCo's deduction limit under Code 404 will not reflect the compensation of the SubCo employees. Code 414(b) says: "With respect to a plan adopted by more than one . . . [controlled group member], the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary." It does not provide any additional deduction limit without cosponsorship. Moreover, there are rulings which challenge whether it is an ordinary and necessary business expense under Code 162 for one related employer to deduct contribuitons for another related employer. [Rev. Rul. 69-525; Rev. Rul. 70-316; Rev. Rul. 70-532; PLR 8032079.]
But let's assume ParentCo makes this unwise choice. Can it disregard the SubCo service before the acquisition? We already know SubCo can't disregard the service, and ParentCo can't disregard the service of Parker and its other employees. And Code 414(b) says ParentCo and SubCo are treated as a single employer. If SubCo can't disregard the service, why should ParentCo when they are now a single employer?
We have more than just statutory reasoning here. DOL Reg 2530.210(d) puts the matter plainly:
That really doesn't leave a lot of wiggle room. "All service with any employer" is "all service."
Some professionals believe that Treas. Reg. §1.411(a)-(b)(3)(iv)(B) mandates a different result. This provision states that for vesting purposes:
Some read this regulation to say that the plan must only credit service which is credited during the period the two entities are related. However, the first sentence of the regulation can also be read to say that during the period the two entities are related, each entity must credit all service with the other entity.
That latter reading follows the DOL regulation (above) that the Treasury regulation cites. The DOL says that all service with any controlled group member must be considered.
Under any of these scenarios, Sandy enters the ParentCo plan the day the plan is amended to cover SubCo employees. Sandy has a year of service and passed an entry date long ago. The plan immediately credits Sandy with four years of service for vesting.
I discuss this further, with examples, at Q 19:27 of the 7th edition of Who's the Employer.
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.