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BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Excluding Employees of Controlled Group Members

(Posted February 14, 2001)

Question 79: Individual X owns 90% of Corporation A. Individual Y (who is unrelated to X) owns the other 10%. X also owns 70% of Corporation B; Y owns the other 30% of B. Neither Corporation A nor Corporation B has a pension plan. X and Y are buying Corporation C (70/30 ownership, just like Corporation B), which does have a 401(k) plan. Corporation C has no highly compensated employees. Are there any section 410(b) problems with not providing any pension benefits to employees of Corporations A and B, assuming that the 401(k) plan document does not require coverage of employees that work for Corporations A or B?

Answer: No.

Let's first make it clear that A and B are in a controlled group. X's "effective control" ownership is 70% and Y's is 10%, for a total of 80%, which is certainly more than the required 50%. Their controlling interest is 100%, which exceeds the 80% requirement. Once they buy Corporation C, it will join the controlled group.

What does that mean? That everyone in the group must be covered? No! It just means that for most plan purposes, all employees of any of the corporations are deemed to be employed by a single employer.

Think of the three companies as though they were a single company with three divisions: Accounting, Business Management, and Computers. Now, if no highly compensated employees worked in the Computers department, could you set up a 401(k) plan covering only the employees of the Computers department? Of course, because IRC 410(b)(1)(B) clearly would be satisfied. And if it would be satisfied in a single company scenario, it would be satisfied in a controlled group scenario.

As I say in Q 10.1 of my book, Who's the Employer?:

For qualified plans, the controlled group rules answer a single question: "Who are the employees of the employer maintaining the plan?" There is almost nothing more important to understand in the controlled group chapters than this. Once the practitioner understands this point, the effects of the controlled group rules fall into place.

The answer to the question at hand flows directly from that basic concept.

Important notice:

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.