The IRS requires that certain sets of employers be treated as a single employer for retirement plan purposes. When establishing a new retirement plan, there are questions that help determine the feasibility of a plan and what provisions to include. Problems can arise after the plan has been adopted when ownership changes unintentionally impact the retirement plan.
What ownership changes should we be concerned about?
The IRS terms for common ownership include “Controlled Group”, “Affiliated Service Groups” and “Attribution”. Each term has a subset of rules to determine which employers should be rolled up as a single “employer”. In general, anytime an existing owner of the sponsoring employer, or their spouse, has ownership changes of another company, you should alert your retirement plan consultant.
Is there a checklist to determine how the companies should be combined, if at all?
In some situations, there is a bright-line determination of how the companies are treated. For example, if a sole proprietor buys 85% of a second company, those companies should be treated as a single employer. In other situations, the rules are so complex that an ERISA counsel may be recommended to aid in the determination. The retirement plan consultant will know when to enlist outside counsel.
How would being treated as a single employer affect the retirement plans?
Qualified plans are required to satisfy participation and nondiscrimination testing requirements. All employees of all related employers would need to be aggregated when performing these tests. In some cases, that may require related employers to adopt the retirement plan and fund benefits for their employees.