FIS Relius
May A Related Employer Maintain Separate Qualified Plans For Each Participating Employer? 5/20/2004
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The answer to the question is “yes.” In fact, the same answer would apply to an employer that is not part of a related employer group that wishes to maintain two plans for different groups of employees (e.g., divisions). Generally, the real question practitioners are asking when they ask such a question is how do we test the separate plans for coverage and nondiscrimination purposes.

In applying the qualification, reporting and deduction rules to qualified plans, the first step is to identify who is the employer. Only after a practitioner has made the determination, can the practitioner properly design and test the plan. The qualified plan requirements, as well as several other employee benefit plan rules, require the employer to apply the controlled group, common control, and affiliated service group requirements (collectively we refer to these rules as a “related employer group”) to determine who is the employer. If two or more entities form a related employer group, the qualified plan rules treat the employers as a single employer. The fact that a group of employers constitute a related employer group does not prevent the group from establishing separate plans with separate matching or profit sharing formulas. However, each plan must satisfy the coverage requirements taking into consideration all of the nonexcludable employees of the related group. If each plan separately satisfies coverage, the employer may test each plan separately for nondiscrimination. If the plans do not separately satisfy the coverage requirements, the employer must aggregate the plans for coverage and nondiscrimination testing. In an aggregated 401(k) plan, the employer would apply a single ADP and ACP test. However, since the two plans likely would have different matching formulas, the employer also would need to apply the nondiscriminatory availability test to the two rates of matching contributions. The employer probably also would need to apply the general nondiscrimination test to the profit sharing formulas because of the nonuniformity.

Example. Corporations X and Y are part of a brother-sister controlled group. X has 2 nonexcludable highly compensated employees (HCEs) and 12 nonexcludable nonhighly compensated employees (NHCEs). Y has 2 nonexcludable HCEs and 8 nonexcludable NHCEs. Each corporation would like to establish a separate 401(k) plan with different matching and profit sharing formulas. Each employer also would like to test their respective plan separately. The X and Y plans each could satisfy coverage separately: X plan’s coverage ratio would be 120% [12/20 NHCEs/ 2/4 HCEs] and Y plan’s coverage ratio would be 80% [8/20 NHCEs/ 2/4 NHCEs]. Accordingly, X and Y may design their plans with different matching and profit sharing formulas and test them separately.

Example. Assume the same facts as in the previous example except Y has 3 nonexcludable HCEs. X’s plan continues to satisfy the ratio percentage test [133% = 12/20 NHCEs/ 2/5 HCEs], but Y’s does not [67% = 8/20 NHCEs/ 3/5 HCEs]. Nevertheless, Y could still test its plan separately for nondiscrimination if it could demonstrate that it could satisfy the average benefit test. Note: For purposes of the average benefit percentage portion of the average benefit test, the employer must aggregate all plans of the employer (i.e., X’s and Y’s plans). Nevertheless, if the plan passes the average benefit test, the employer may test the plan separately for nondiscrimination.

Example. Assume the same facts as in the first example, except X wishes to set up a SEP. The SEP would necessarily cover all eligible employees of all related employer group members. The same would be true of a standardized qualified plan or of a SIMPLE IRA arrangement.

In our half-day specialty program, “Who’s The Employer”, we offer a thorough discussion of the related employer rules along with explanation of the leased employee, PEO and attribution rules.