Question 62: What rules apply when a partnership that has been a participating employer in a 401(k) plan of a group of trades or businesses under common control chooses to withdraw from the plan (no spinoff or other transaction involved, just an amendment to cease being a participating employer)? Are the rules any different from the rules that would apply if the partnership had initially chosen not to be a participating employer?
Answer: Without a doubt, the most important thing to remember about controlled groups under Internal Revenue Code section 414(b), groups of trades or businesses under common control under section 414(c), and affiliated service groups under section 414(m) is that the employees of all group members are treated as employed by a single employer for purposes of most Code provisions relating to qualified plans.
Therefore, the way to handle most all questions that ask about the consequences of affiliated group membership is to ask, "How would I handle this if I were talking about one division of a single company, rather than two companies?" Almost always, that will lead you to the correct answer.
In this case, suppose you had the Acme company with two divisions, sales and administration. Acme has sponsored the plan for years covering both divisions, but now decides to pull administration out of the plan, so the plan will only cover sales. Can it do so? Sure. What are the consequences? Everyone from both divisions are still employees, and still have to be considered in testing for satisfying the coverage requirements, for example, but iif you can pass the various tests, happy day. Have the administration employees separated from service? No, of course not. Is it a partial termination? Almost undoubtedly.
Apply the same reasoning to the situation in the question.
Incidentally, IRC 410(b)(6)(C) does not apply to this situation to give you a free pass of the coverage rules. This is not a change in group membership. Rather it is a change in group sponsorship.