Adopting Employer

Business 1 - 401k plan is currently in place - 1 Owner. 

Business 2 - Business Opens another location 6 month later - that owner is the Parent to Owner 1 above.

Can Business 2 just adopt Business 1 plan as an Adopting Employer, since they will create a Controlled Group?   Would there be Plan Amendment needed only for that?

7 minutes ago, JMP said:

Business 1 - 401k plan is currently in place - 1 Owner. 

Business 2 - Business Opens another location 6 month later - that owner is the Parent to Owner 1 above.

Can Business 2 just adopt Business 1 plan as an Adopting Employer, since they will create a Controlled Group?   Would there be Plan Amendment needed only for that?

 

Ummm.... is this understanding correct? 

You have Company A owned by Mr. X. Company B is owned by Mr. Y who is Mr. X's father.  Is that the situation?

Assuming they are of the age of majority, why do you think you have a controlled group?  Neither owns more than 50% of the OTHER'S business, so why is it a controlled group?

So first let's deal with that, and if what I think it true, then we need to talk about multiple employer plans if they both adopt the same plan.

They own 50% of each business.

13 minutes ago, JMP said:

They own 50% of each business.

Since this is different that what you said in the original post, let's have you be very specific. Tell me how much Mr. X and Mr. Y owns of Company A and Company B.  It appears now that you are saying it is:

                         Company A            Company B

Mr. X                     50%                       50%

Mr. Y                     50%                       50%

Is that correct?

Thank you for asking for clarity.   Your demonstration above is correct on the ownership!

14 hours ago, Larry Starr said:

Since this is different that what you said in the original post, let's have you be very specific. Tell me how much Mr. X and Mr. Y owns of Company A and Company B.  It appears now that you are saying it is:

                         Company A            Company B

Mr. X                     50%                       50%

Mr. Y                     50%                       50%

Is that correct?

OK; so the above is correct.  Now let's look at your original question: Can Business 2 just adopt Business 1 plan as an Adopting Employer, since they will create a Controlled Group?   Would there be Plan Amendment needed only for that?

They are absolutely a brother-sister controlled group.  Thus, Company B is free to adopt the existing plan of Company A as an additional adopting employer.  The addition of an adopting employer IS an amendment to the plan. 

I don't know what you mean when you use the word "only" in the second sentence; you need to make sure the proper process is used to add an additional adopting employer, which for us would be an amendment to the plan that we prepare and is adopted by the existing plan sponsor, the new adopting sponsor, and all the trustees.

JMP, if it is a preapproved plan there will usually be a section towards the front of the adoption agreement where primary employer is designated, another place close to the first where you can list the "other adopting employers," and a signature page at back of document for the "other adopting employer." You should check both the adoption agreement and the basic plan document for governance provisions, e.g. there should be a "lead employer" that makes rules, can adopt compliance amendments, etc.

3 hours ago, Luke Bailey said:

JMP, if it is a preapproved plan there will usually be a section towards the front of the adoption agreement where primary employer is designated, another place close to the first where you can list the "other adopting employers," and a signature page at back of document for the "other adopting employer." You should check both the adoption agreement and the basic plan document for governance provisions, e.g. there should be a "lead employer" that makes rules, can adopt compliance amendments, etc.

Luke, be aware that not all preapproved plans operate in that manner. What you are really referring to is an adoption agreement formatted document, which will often have the options you mention in the boilerplate. However, the plan (adoption agreement) must still be amended as I noted in my response.

We use preapproved documents called Volume Submitter documents and they are formatted as a single plan and trust with all the specific provisions incorporated and nothing that is not a provision showing up in our language.  The document looks very much like an individually designed plan, which it really is (that is, we custom design each plan for each client), even though IRS has approved our documents as VS plans.  Just, FWIW.

15 hours ago, Larry Starr said:

Luke, be aware that not all preapproved plans operate in that manner. What you are really referring to is an adoption agreement formatted document, which will often have the options you mention in the boilerplate. However, the plan (adoption agreement) must still be amended as I noted in my response.

We use preapproved documents called Volume Submitter documents and they are formatted as a single plan and trust with all the specific provisions incorporated and nothing that is not a provision showing up in our language.  The document looks very much like an individually designed plan, which it really is (that is, we custom design each plan for each client), even though IRS has approved our documents as VS plans.  Just, FWIW.

Thanks, Larry. Well aware of prototype vs. VS distinction, of course. Mostly see prototype. And sure, its an amendment in the sense that you have to complete the AA correctly, or go back and stick in some slip pages. What I have come across, of course, is folks with a small CG group and overlapping entrepreneurs, where one member has taken lead on payroll, etc., and they don't read the AA closely enough to realize that all the companies have to be listed and sign once. Used to see a lot of prototypes that had language where each CG member was deemed to adopt, but that had problems as well, of course.

8 hours ago, Luke Bailey said:

Thanks, Larry. Well aware of prototype vs. VS distinction, of course. Mostly see prototype. And sure, its an amendment in the sense that you have to complete the AA correctly, or go back and stick in some slip pages. What I have come across, of course, is folks with a small CG group and overlapping entrepreneurs, where one member has taken lead on payroll, etc., and they don't read the AA closely enough to realize that all the companies have to be listed and sign once. Used to see a lot of prototypes that had language where each CG member was deemed to adopt, but that had problems as well, of course.

Yes, I remember seeing that language and I always felt that it actually didn't do what it said it did. If H owns a corporation and it is in a CG with spouse W, there is no way that the adopting of a plan by H's business can automatically mean that W's corporation has any responsibility for the benefits under that plan, even though that plan says W's company is  automatically an adopter.  Unless W's company takes a legal action to adopt a plan for W's employees,W doesn't have a plan no matter what "his" plan says.

52 minutes ago, Larry Starr said:

Yes, I remember seeing that language and I always felt that it actually didn't do what it said it did. If H owns a corporation and it is in a CG with spouse W, there is no way that the adopting of a plan by H's business can automatically mean that W's corporation has any responsibility for the benefits under that plan, even though that plan says W's company is  automatically an adopter.  Unless W's company takes a legal action to adopt a plan for W's employees,W doesn't have a plan no matter what "his" plan says.

Right. And folks did not realize it was in there and that they were covering employees of another company. A lot of potential problems. I agree with you that from a legal standpoint, it does not make sense. I'm not sure if the IRS still approves plans with that language.

Thank you both...this is very helpful!!