Discriminatory Timing? No longer a controlled group

Jane starts out 2020 owning 100% of both Company A and Company B.  Both companies make and sell products, they are not service orgs and they do not provide services to each other.  Company A has about 50 ees and a 401(k) plan.  Company B just employs Jane and her husband (B's actual production is outsourced) and B has no retirement plan.

In July 2020, Jane sold 23% of A to a private equity firm, so now she owns 77% of A and 100% of B.   So effective with the transaction they are no longer a CG.

Can they now establish a plan in B for just Jane and husband for 2020?

My first reaction is that if the plan is set up for calendar year 2020 this would not work due to the CG. Coverage testing would be based on the plan year and they have former NHCEs > 500 hours in the testing group.   If they set up a plan in B effective 10/1/20, then the plan never exists while there is a CG, and the testing year would not include any NHCEs so presumably they would not have to consider company A in coverage.   But does this raise a potential 1.401(a)(4)-5 discriminatory timing concern?     Thanks.

Agree that a calendar year 2020 plan for B (e.g., effective 1/1/2020) would require aggregation of A and B's plans for coverage and non-discrimination testing. Agree that an effective date of 10/1/2020 for plan B would not result in aggregation.  As far as 1.401(a)(4)-5 timing issues, a 10/1/2020 effective date for plan B, when A and B are no longer part of the same CG should not cause a problem, assuming that the sale to the PE is a legitimate business transaction (i.e., not a subterfuge to avoid 401(a)(4)). 

Have a similar scenario. In your 10/1/20 effective date, would you pro-rate the 415 limit for the 3 month short plan year? Haven't done any research but thinking 415 limit would be based on limitation year which is still 12 months. Does that change anything?

38 minutes ago, EMoney said:

Have a similar scenario. In your 10/1/20 effective date, would you pro-rate the 415 limit for the 3 month short plan year? Haven't done any research but thinking 415 limit would be based on limitation year which is still 12 months. Does that change anything?

We are talking DB.  I will likely recommend a 12 month plan year and the client would take the full year deduction for the PY beginning in the FY, per 1.404(a)-14(c) just to avoid the whole short year issue.  The old '80s Plastic Engineering case provides authority for a full normal cost deduction in a short year, but in later IRS guidance for automatic approval of plan year changes they required pro-rating the deduction.   I am not aware of any other authoritative guidance on this, are you or anyone else?

My apologies. I didn't read carefully enough and missed that it was a DB situation. Mine is a DC situation.