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News from, December 21, 2011
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Commonality of and Control by the "Employer"
Reprinted with permission from 401(k) Advisor

The Internal Revenue Code and the labor sections of ERISA are often, but not always, the same.  Code §413(c) governs multiple employer plans for income tax purposes.  It has no commonality or control requirement for the adopting employers.  However, the DOL interprets and enforces the labor provisions of ERISA. ERISA defines an employee benefit plan as being a plan "established or maintained by an employer, an employee organization, or both." ERISA § 3(5) provides that the employer is "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan and includes a group or association of employers acting for an employer in such capacity.”  

However, in one DOL advisory opinion, a United Way organization co-sponsored a retirement plan with other charities. The United Way did not control the other charities. Code §413(c) applied, yet the DOL ruled that the plan was not a single ERISA pension benefit plan due to the lack of commonality or control by the adopting employers, and as a result the 5500 and audit requirements applied separately to each sponsoring employer.  

Can Different Employers Make Different Levels Of Contributions Allocated To Each Employer’s Employee-Participants? The well-known and widely used book S. Tripodi, The ERISA Outline Book, in the section in chapter 1A, in discussing the definition of multiple employer plan, states:  "In our view, whether each employer separately contributes for its employees is not the issue. Instead, the "single plan” issue should turn on the plan's treatment of invested assets with respect to its liabilities to make benefit payments. For the plan to be treated as a collection of separate plans under this view, the investments made with respect to each contributing employer's contributions would have to be separately accounted for, so that a participant's benefits earned with respect to contributions made by that employer could be paid only from the investments attributable to such contributions. Proponents of this view point in particular to §1.414(l)-1(b)(1)(i) and (v), which states that a plan does not fail to be a single plan merely because "the plan has several distinct benefit structures which apply either to the same or different participants," or because "separate accounting is maintained for purposes of cost allocation but not for purposes of providing benefits under the plan."  

However, the Tripodi book says that there is some doubt about this: "Under the opposing view, the mere separate calculation of contributions on behalf of participants, which is determined along company lines, creates separate plans under IRC §414(l), even if the plan does not separately account for the investments attributable to such contributions. Under this theory, [employers] would be treated as maintaining separate plans, rather than a multiple employer plan, even though the companies operate their plans under a single plan document.  

Forfeiture Allocation In DC Multiple Employer Plan – Must They Be Allocated Uniformly To All Employers’ Participants?  This too is an area of some uncertainty.  Sal Tripodi in his book continues: "When a participant incurs a forfeiture under a multiple employer plan, how does the plan deal with the allocation of such forfeitures? Are the forfeitures allocated to all participants, regardless of which employer contributed the funds attributable to that forfeiture, or are the forfeitures allocated only to the participants employed by the company whose contributions are attributable to the forfeiture? Should the manner in which the plan deals with forfeitures affect whether the plan is a single plan? Some practitioners feel that the allocation method for the forfeitures is irrelevant to the single employer determination. . . . Proponents of this first view argue that the allocation of the forfeitures to the employees of a particular employer is simply a means of determining how much each participant's account increases for that plan year with respect to services with that employer, and does not mean that funds attributable to that employer are available only to pay benefits of that employer's employees. When the plan pays benefits, the funds used to satisfy that payment might be attributable to investments made with respect to contributions (or forfeitures) attributable to a different company. . . . Other practitioners take the view that, in order to have a single plan, the plan must allocate the forfeitures to all participants who are eligible for allocations for that year, regardless of which company made the contributions attributable to that forfeiture.”  

IRS Determination Letter. If one or more participating employers is also requesting an individual determination letter, a separate fee schedule applies, based on the number of Forms 5300 being filed. A Form 5300 is filed for the plan as a whole, and an additional Form 5300 is filed for each participating employer requesting a separate determination letter. See section 10.02(2) of the general determination letter procedure, Rev. Proc. 2011-6. Thus, for purposes of the user fee, the number of Forms 5300 being filed includes the Form 5300 being filed by the primary sponsor. Each participating employer that wishes a determination letter files a separate Form 5300, completed through line 8, a completed adoption agreement, if applicable, and then may complete the coverage questions and request determinations for which Schedule Q is needed. If the multiple employer plan is adopted by other employers after the initial submission, the normal determination letter application fees would apply to a determination letter requested by such employer.  

5500 Reporting.  If the plan is a multiple employer plan that is not collectively bargained (identified as a "Multiple-Employer Plan (Other)" in the instructions to the Form 5500 series), and if the plan is not treated as a group of separate plans, one annual 5500 report is filed for the plan as a whole, but certain separate coverage testing information is required for each participating employer.  

Coverage, Nondiscrimination And Top Heavy Testing. The coverage and nondiscrimination testing rules are performed by each participating employer as if that employer maintained a separate plan. Treas. Reg. §1.413(c)-2(a)(3). In addition, each participating employer is treated as having a separate plan for purposes of top heavy testing. See Treas. Reg. §1.416-1, G-2.  

Minimum Funding. If the multiple employer plan is a pension plan, the minimum funding requirements under IRC §412 generally are determined as if each participating employer maintained a separate plan. See IRC §413(c)(4)(A) and Treas. Reg. §§1.430(d)-1(a)(3), 1.430(g)-1(a)(2), 1.430(h)(2)-1(a)(2), and 1.403(i)-1(a)(2). Thus, the minimum required contribution is computed separately with respect to each participating employer.      

Reprinted with permission from 401(k) Advisor.

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