Risks to Individual Plan in Controlled Group

Company A and Company B are owned by the same individual and each have their own 401(k) plan (lets' call them Plan A and Plan B. Nondiscrimination testing has been done on a controlled group basis. It has come to light that the testing was not done correctly with respect to Plan A for the past several years - union and nonunion employees were not tested separately as required. Plan B has no union participants. The testing is in the process of being redone correctly.

What are the risks to Plan B in this situation?  If they fail to pass the tests now, when Plan A's union/nonunion employees are disaggregated correctly, is this a failure to pass for Plan B? I presume it would be, but what if the actions taken to get the plans to pass apply only to Plan A (i.e. Plan A makes QNECs)?  Since we're talking about prior plan years, does Plan B have to file with VCP since they failed the nondiscrimination testing and didn't correct within the designated time period? Even if the correction actions are to be taken by Plan A only?

Don't jump to conclusions without retesting the plans.  If B can pass as a standalone plan, then B wouldn't have an issue.  If B actually needs to be aggregated with A in order to pass, then the issues "may" begin.  Your first step is to prove each plan (either as a standalone or permissively aggregated with the other plan) passes the required nondiscrimination tests.  It may end up being a non-issue. 

Good Luck!

Thank you for your response.  To clarify, what if B passes as a stand alone plan, but A does not pass either as a standalone plan or when aggregated with B? Can one plan pass as a standalone and the other as aggregated?

Historically, they have been aggregated and Plan A has had to make QNECs to Plan A to NHCEs employed by the sponsor of Plan B (i.e. giving them a benefit in Plan A) in order to pass. If Plan A must do that for a prior year, and file a VCP, it wouldn't affect Plan B if Plan B passes on it's own - is that correct?

What you have said makes absolutely no sense.  There is no structure which calls for "QNECs to Plan A to NHCEs employed by the sponsor of Plan B (i.e. giving them a benefit in Plan A) in order to pass."  Why wouldn't those QNEC's be paid to Plan B?  Somebody needs to hire somebody who understands non-discrimination testing.

Thanks, that was very polite and helpful Mike.