Coverage Transition Question

Company A sponsors a 401(k) plan and purchases unrelated Company B in 2017, forming a controlled group.  In 2018 Company B adopts its own 401(k) plan.

The entire time through 2020 the controlled group has been relying on the coverage transition rules.

It seems to me that Company A would have reliance, but Company B should not have had reliance since the Plan started after the transaction and during the transition period.

If that is correct, and assuming the two plans could not satisfy coverage separately, would the correction be to retest both plans together starting with the 2018 plan year?

Thank you very much.

Sorry, misspoke above.  They were using the coverage transition through the 2019 plan year, not 2020.  That's still not correct, I know, but for some reason I guess they thought the rule started with the adoption of the new plan in 2018.  From what I'm also hearing is that each company had it's own service providers so each one may have been hearing different facts.  That part I do not know.  Thanks very much.

The 1.410(b)-2(f) transition relief from 410(b) applies only if the plan satisfies 410(b) immediately before the acquisition. Company B's plan, adopted in 2018, did not exist before the acquisition, so the relief does not apply to Company B's plan for 2018, 2019, and 2020. If Company B's plan does not satisfy 410(b) for those years separately, then one option for B to pass 410(b) is to try to aggregate with Company A's plan for those years and hope that the aggregated plans pass 410(b). 

Thank you F.E.  Then assuming coverage passes in the aggregate, ADP/ACP, etc., would also have to pass together for those years, correct?

Here's a separate, but similar question.  

Suppose instead of an acquisition, the owners of Company A create a separate Company B.  Some A employees go to work for B, and there are also new hires at B.  Since a controlled group is now created, does A's plan get the benefit of the transition rule, and not need to consider Company B employee for coverage until the end of the coverage transition period, or does this type of transaction not qualify for the coverage transition rule at all?

Thank you very much.

2 hours ago, Gilmore said:

Then assuming coverage passes in the aggregate, ADP/ACP, etc., would also have to pass together for those years, correct?

Yes, but the problem in passing the ADP/ACP test is that the 401(k) plans should have the same plan year, and the same testing method. You cannot aggregate a SH 401(k) with a non- SH 401(k) plan. For non-SH 401(k) plans, they should have the same testing method (current versus prior year). It would be nice if they have the same eligibility features, and similar BRF (otherwise you may have to 401(a)(4) BRF testing). So, it can become a mess. 

3 hours ago, Gilmore said:

Suppose instead of an acquisition, the owners of Company A create a separate Company B.  Some A employees go to work for B, and there are also new hires at B.  Since a controlled group is now created, does A's plan get the benefit of the transition rule, and not need to consider Company B employee for coverage until the end of the coverage transition period, or does this type of transaction not qualify for the coverage transition rule at all?

This type of transaction would not qualify.

Thank you for your time and knowledge.