Below is one of Derrin Watson's Q&As, wherein he states that an option to acquire stock cannot break up a controlled group of companies, and provides an example to illustrate this. Does anyone know where in the Code or the regulations it says that an option to acquire stock from the corporation -- as opposed to an option to acquire stock from another shareholder -- cannot break up a controlled group?

Can Options Break Up Controlled Groups? (Posted March 19, 1999)

Question 18: Can I use options to break up a controlled group? Suppose, for example, John owns all 100 shares of Corp. A and 85 of the 100 shares of Corp. B, a classic brother-sister controlled group. (The remaining 15 shares of Corp B is owned by an unrelated party, Xavier.) Corp. B grants Charlie (an unrelated party) an option to buy 10 shares. Now John owns 85/110s (77%) of Corp B, because Charlie is deemed to own the 10 shares, and there isn't a controlled group.

Answer: No. Neither attribution through options nor any of the other attribution rules can have the effect of dividing a controlled group. They do not change the ownership prior to the attribution, they merely create an alternative stock ownership. A controlled group exists if the ownership tests are met either under the actual ownership or under an alternative ownership through the attribution rules.

In the example above, John now owns 85% of Corp. B, and the attribution rules do not change that fact. That being the case, the two corporations are in a controlled group, regardless of what changes may happen to ownership percentages after attribution.

The attribution rules never break up a group, but they can create groups that otherwise would not exist. Suppose, for example, that there was a Corp C in which Charlie and John each owned 50%. Before attribution, Corp. B and Corp C are not in a controlled group (because B owns less than 80% of Corp. C and Charlie doesn't own any Corp. B stock and hence is ignored under Vogel Fertilizer.) After attribution because of the option, Charlie does own Corp. B stock and John and Charlie together have both effective control (more than 50%) and a controlling interest (at least 80%) in both corporations and a controlled group exists between Corp. B and Corp. C.

Incidentally, this means that Corp. B is in two different controlled groups, (A and B) and (B and C). For ordinary income tax purposes, this means that B can choose which group it is in. However, for corporate plan purposes, it is a part of both groups. My position is that since all employees of Corp. A and Corp. B are deemed to be employed by a single employer, and all employees of Corp. B and Corp. C are deemed to be employed by a single employer, then there is one employer of the employees of all three corporations and they are tested together.

Company A was bought out by Company B on April 1, 2018. Company A funded a 3% SH contribution and NCPS. The previous owners would like to fund the contributions for their compensation with Company A from Jan. 1 -- March 31 (along with the participants of Company A's plan too, of course). According to Company A, the acquisition was neither an asset or stock sale. They said, "The entities are LLCs, therefore, the way the merger worked is that Company A contributed all of its assets and liabilities to Company B, and in return it received an ownership interest in Company B".

[1] Sounds like an asset sale to me but I may be wrong. Has anyone heard of this?

[2] Does the safe harbor profit sharing have to be funded pre-merger (1/1/2018 -- 3/31/2018) for Company A's Plan? Can a discretionary new comparability profit sharing be contributed pre-merger (1/1/2018 -- 3/31/2018) for Company A's Plan?

[3] If it's considered a short plan year, does the ER contribution get pro-rated? I believe it depends on whether it was a stock or asset sale.

We have a one person DB plan sponsor. FY is calendar. PYE is 9/30/18. He contributed for the 2017 plan year in Feb. 2018 and filed his 2017 tax return without extension. Then he made the 2018 deposit in September 2018 before the 2017/2018 PYE. Because he deposited the money during the plan year it will be listed on the 2017 SB but he'll deduct it in 2018. The 2017 PY max deduction doesn't cover the entire amount, but we have time to amend the formula back to 10/1/2017 so it's deductible. We're concerned with the deposits during being split between the 2 tax years. I think it's OK, but would like another opinion.

So say you have a fairly large 401(k), 100's of employees, a few million dollars in deferrals ever year, $100k or so in deferrals each payroll period. CPA says that employee contributions should have been made, say, within 2 days of payroll date. That's reasonable. Most were, but some were made 3, 4, 5, or in one case 8 days later. Out of 24 payroll dates, maybe 10 have a problem. You calculate the lost interest and it is, say, in the 10's of dollars for each payroll, maybe $1,000 for the entire year.

DOL's VFCP Notice says the correction is to contribute the "Lost Earnings," but does not elaborate further. So good, you contribute the $1,000. My question is, how do you allocate it? The lost earnings arguably should be allocated as of each payroll date that had a late contribution, to the accounts of the participants who deferred on that date, in proportion to their deferrals. This will result in hundreds of separate allocation amounts, many less than one dollar. The administrative expense of doing that may easily exceed the amount being allocated. And some of the participants will have left and already cleared out their accounts.

Assuming your plan document can be interpreted to permit this and it passes nondiscrimination, can you do something different, like allocate per capita to anyone who (a) deferred during the applicable year, e.g. 2017, and (b) still has an account in the plan?

I am aware of the recent EBSA regional office letter urging employers to use the formal VFCP process, even for small amounts, rather than self-correcting, so my question is not directly about that, although maybe that is involved because if you go through the VFCP process you could get your short-cut allocation method approved by EBSA?

Treas. Reg. 1.409A-1(g) says that a controlled group is to be treated as a single service provider. 1.409A-1(h)(3) says that for the purposes of the definition of "separation from service," the required quantum of ownership to determine a controlled group is reduced from 80% to 50%, whether you are dealing with a parent-sub (1563(a)(1)) or brother-sister (1563(a)(2)) relationship, but I can take the 50% up in my plan document, apparently for any reason, but not above 80%. I can also, but this time only if I have a business reason, instead reduce the 50%, but not below 20%. I think I've got all that right.

However, either for some policy reason that escapes me or because it simply slipped the minds of the reg writers, the ability to ratchet the 50% down to 20% or any point in between is tied to the statute's reference to "80%." Works fine if the relationship you are dealing with is a parent-sub, but if you have a brother-sister, ratcheting down the 80% requirement (i.e., 5 or fewer individuals, estates, or trusts must own at least 80% of each company) will not help if you cannot also reduce the separate 50% requirement (i.e., looking to the lowest percentage that each of your five individuals, estates, or trusts own in each company, the 5 or fewer group must own at least 50% of each company).

It's possible that part of the problem (either mine or the reg writers') stems from the fact that 1563(a)(2) is really 1563(f)(5) for purposes of 414(b) and (c). I'm pretty sure, however, that the references in 1.409A-1(g) and1.409A-1(h)(3) to 1563(a)(2) are really (i.e., really "really," not just intended "really) to 1563(f)(5), but I'm not sure if even that is absolutely certain.

For a plan year ended 12/31/2017, an auditor determines that, during 2017, there were multiple failures to timely remit participant deferrals and loan repayments to the trust. The TPA does not agree with this assessment, as the plan became a large plan on 1/1/2017 and the employer was following the small plan safe harbor (7 business days) in remitting contributions. Even using this guideline, the auditor found multiple violations of the 7 day window.

The TPA now realizes that it must file a Form 5330 regarding the IRC Section 4975 excise tax; however, no extension was filed, and they are concerned about possible penalties and interest for a late filing of the return. Does the TPA have any possibilities of filing the extension now, providing a "reasonable cause" for not filing the extension, and see what the IRS does?

Terminated DB plan has distributed all participants' benefits, satisfying all benefit liabilities. Rather than pay surplus excise tax, the surplus will be transferred to a qualified replacement plan, then allocated to participants (same as DBP participants). Is Form 5310-A necessary?

The terms of a governmental 457(b) plan document do not require spousal consent to name a non-spouse beneficiary. So the only other relevant rule (it seems to me) would be 401(a)(11), which requires spousal consent as part of naming non-spouse beneficiary for exception of QJSA/QPSA requirements. Section 401(a)(11) does not apply to governmental plans or 457(b) plans. So no requirement for spousal consent to name non-spouse beneficiary, here, correct?

No more paper filings permitted for VCP -- see Rev. Proc. 2018‑52, about which a bulletin went out from BenefitsLink on Friday afternoon.

Excerpt:

... in accordance with sections 10 and 11 of this revenue procedure or by filing paper VCP submissions in accordance with the procedures in sections 10 and 11 of Rev. Proc. 2016‑51. However, the IRS will not accept paper VCP submissions postmarked on or after April 1, 2019.

[3] Modifications to section 11. Section 11 sets forth filing procedures for VCP submissions. These procedures have been modified to reflect electronic filing of VCP submissions and payment of applicable user fees using the www.pay.gov website. An electronic VCP submission filed using the www.pay.gov website must include many of the same documents as a VCP submission filed on paper pursuant to Rev. Proc. 2016‑51; however, there are procedural differences.

First, an applicant must use the www.pay.gov website to create a pay.gov account. This pay.gov account will be used when filing a VCP submission and paying applicable user fees.

Second, after a pay.gov account has been established, the applicant must complete Form 8950, Application for Voluntary Correction Program (VCP) Submission Under the Employee Plans Compliance Resolution System, using the www.pay.gov website. Beginning April 1, 2019, applicants are not permitted to submit a paper version of Form 8950.

Third, documents relating to the VCP submission, including the description of failures, Form 14568 (Model VCP Compliance Statement), Schedules 1 through 9 of Form 14568, and any other applicable items (as set forth in section 11.04) for a VCP submission generally must be converted into a single PDF (Portable Document Format) document and then uploaded onto the www.pay.gov website. However, there is a 15 MB size limitation for uploading a PDF document onto the www.pay.gov website; thus special instructions are provided for PDF files that exceed that limitation.

Fourth, section 11 provides new procedures relating to the payment of user fees using the www.pay.gov website, including the generation of a payment confirmation. For submissions made using the www.pay.gov website, the IRS will no longer mail an acknowledgment letter to the applicant. Receipt of a submission will be acknowledged through the generation of a unique Pay.gov Tracking ID on the payment confirmation after the VCP submission is filed and the user fee is paid. A Plan Sponsor may designate an authorized representative to file a VCP submission with the IRS using the www.pay.gov website. Section 11.08(2) sets forth specific instructions on how to designate an authorized representative using the Form 2848, Power of Attorney and Declaration of Representation.