Plan Split to Avoid Audit

Current 401(k) Plan will have around 140 participants as of 12/31/2021, thus making it subject to a certified audit. The plan sponsor, to avoid the cost of an audit, desires to split the plan into two (plans are identical), effective 1/1/2022, so that each plan has 70 participants, making them not subject to audit. The assets of the plan will not be split, but, rather, will remain in the current trust, and will be administered and "record-kept" by the current TPA.

Questions:

As the old plan will technically have 140 participants on 1/1/22, and then, later in the day, will be at 70/70, is the old plan subject to a one day audit?

Second, is it allowable for the assets of both plans to be in the same trust? I would say yes if the trust were designated a Master Trust, but the TPA has no idea as to what a Master Trust is. I did some reading and came upon a Group Trust, but this appears to cover plans of different employers.

Any comments would be appreciated, thank you!

DOL is on record stating that if the assets are combined it is subject to audit.  I don’t have the cite handy but AFAIK their position on this hasn’t changed.  

I don't think the old plan will have 140 participants the effective date of the change.  There isn't a "later in the day" on the effect. It is effect is immediate, so think 12:00 AM. On that basis, the old plan will have 70 participants and the new plan will also have 70 participants on January 1. So they should be able to avoid the audit requirement.

As for two plans in the same investment trust, that would constitute a Master Trust and an additional 5500 filing for the MT as a Direct Filing Entity.  No designation as a MT is required, just more than one plan in a single trust.

It seems to me that employers who use this strategy don't find it beneficial in the long run.  It saves money for a year or two.  But they have operational problems managing two plans.  If the company continues to grow, they will have the same problem in a few years. This setup becomes too much of a burden to continue. So they bite the bullet and return to having a single plan.  

If the sponsor's purpose is to get plans with small-plan counts of participants, should the sponsor make the split effective December 31, 2021 (perhaps after all investment funds price shares and units, and before midnight)?

I don't have a cite handy but when we have done this, we have always required some logic to the split.  Maybe function or site?  I think it is a little aggressive to just divide employees down the middle and declare one group eligible for Plan A and the other group eligible for Plan B.  Also, we have always split the assets (our plans are participant directed with specific assets belonging to specific Participants).  How will you or the TPA or vendor produce statements for the Participants in Plan B if they have assets in Plan A?

There is a 2019 Article in Plan Sponsor (b)lines on this topic.  Also see Mike Preston's post in July of 2010 on this site.  Finally, there apparently was a discussion at an ASPPA meeting in 2000 where the DOL discussed issues of avoidance and evasion.

I would do this carefully with some reasons other than avoiding the audit.

Patricia, I just said 70/70 for the split for illustrative purposes; there is logic as to how they propose splitting the participants between the two plans. And there, in the sponsor's logic, is no chance that a participant will have assets both in Plan A and Plan B; their account will "move" from one to the other.

I was speaking to a large recordkeeper recently who of course will remain nameless.  All I know is that this is a thing that is done.  I personally do not agree with it because the ERISA definition of a plan about commingling assets, etc.  I doubt the Master-Trust option is ever feasible in this size plan.  So I don't like it personally.  

I get the motivations though, obviously the pricing is much better and no blackout period.  See if you get a letter from a lawyer on fancy letterhead is my advice to the TPA.  It's what I would do.

With the caution that nothing a government speaker says in an association’s conference is law, consider Q&A 14 [pages 17-18] in the attached report from an American Bar Association conference.

The inquiring lawyer set up the question and, following the ABA committee’s convention, a proposed answer to make it easy for the Labor department speaker to say an administrator should treat the two plans as, in substance over form, one plan, at least to apply ERISA’s provision on whether to engage an independent qualified public accountant.

The government speaker didn’t take up the hint.  Instead, the answer says an administrator may follow what the same person, as the plans’ sponsor, specified, even if the purpose is to evade an ERISA § 103 audit.

2009-05-07 Am Bar Assn Joint Committee on Employee Benefits Q&A.pdf

Well it doesn;t reference in my opinion the key issue which is the commingling.  If there is a business purpose (union / non-union, different legal entities, salaried/hourly) then seperate plans are separate plans, no doubt about it, and no aggregating for audit counts.

It's putting all the money in one recordkeeping contract that gets fuzzy. 

The proposed rules regarding Defined Contribution Groups actually require that all plans in the group have the same trust. However any small plans within the group are not considered to be large plans merely because they are a member of the group, and would not require an audit merely because they are a member of the group.

I think this rule suggests that the DOL contemplates separate plans being in the same trust.

austin3515, you’re right that dividing plans to evade an ERISA § 103 audit would fit only if all plan, trust, investment, service, and related records logically follow the separateness of the plans.

If a collective trust, master trust, or other trust for more than one plan is used, one would want the separateness of the participating plans, and the separate accounting between or among them, to be carefully documented.

Further, service agreements with a recordkeeper, a third-party administrator, and other service providers would show separateness of the plans (and each plan’s trusts), and might incur multiple per-plan fees.

C.B. Zeller, you’re right to describe one of the many ways two or more plans might together use a trust (or a trust substitute, such as a custodial account or an annuity contract).  What matters is whether the documents and accounting show the separateness of the user plans.

Anybody's opinion change after this? The plan Trust Agreement states the following:

3.09  Combining Trusts. At the employer's direction, the Trustee, for collective investment purposes, may combine into one trust fund the Trust created under this Plan with the trust created under any other qualified retirement plan the employer maintains. However, the Trustee must maintain separate records of account for the assets of each Trust in order to reflect properly each Participant's Account Balance under the qualified plans in which he/she is a participant.

No, pretty much every document includes similar language. 

The quoted text is an example of a provision designed to allow two or more plans, each with its separate plan trust, to invest together using a master or collective trust.

That a trustee of a plan’s trust is empowered to use such a master or collective trust does not excuse any plan trust’s trustee from duties about separate accounting.

Further, one would want service agreements with a recordkeeper, a third-party administrator, and other service providers to show separateness of the plans (and each plan’s trusts).