Controlled Group Coverage Testing for Employees of Both Members

Controlled group members Company A and Company B have some non-highly compensated employees who receive wages from both companies ("dual employees").  Company A sponsors a 401(k) plan.  Company B does not sponsor a plan, and is not a participating employer in Company A's plan.

Owners do not want to cover any Company B employees or to count Company B wages as plan compensation of dual employees.  Dual employees participate in the plan to the extent of their compensation from Company A only.

For purposes of coverage testing, is each dual employee treated as one employee of Company A who is participating and as one employee of Company B who is not participating?  This seems counterintuitive if a controlled group is deemed a single employer for plan purposes.  Is each dual employee instead treated as a single employee of the controlled group, thereby helping pass the ratio percentage test on the basis of their participation in the plan, even though their Company B wages are excluded, but presenting a likely discriminatory definition of compensation problem because of that exclusion? 

They are one employee.

If their Company B wages are excluded you will have a 414(s) tests on compensation I believe. No?

I haven't run into this particular situation but it looks like you have 3 groups of employees when running your tests.

(1)The employees of ONLY A - who are fully benefiting.

(2)The employees of BOTH A & B - who are partially benefiting.

(3)The employees of ONLY B - who are not benefiting.

Are there any HCEs who are in (2)?

14 hours ago, Plan Doc said:

Company B wages are excluded, but presenting a likely discriminatory definition of compensation problem

Possibly, but will depend on the facts.

1 hour ago, Lou S. said:

you will have a 414(s) tests on compensation I believe. 

Yes, Lou is correct. An employee is an employee of the control group (denominator) and if they get a contribution from the plan (or eligible to defer) then they benefit (numerator). Coverage is likely not your issue, but rather nondiscrimination, whether the compensation definition or contributions in general (looking at total compensation).

14 hours ago, Plan Doc said:

Owners do not want to cover any Company B employees or to count Company B wages as plan compensation of dual employees. 

All well and good, but unless you're in the process of setting up the plan now, what the owners want may not matter for any PY in the books because it all depends on what the plan document says, do not ignore what the plan says.

Thank you, Lou S. and CuseFan; it looks like a discriminatory compensation problem more than it does a coverage issue.