|News from NIPA.org, October 12, 2011|
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The Latest Q&As for TPAs
A: Sure. Actual is what it sounds like: what the person actually owns. Identical (IRS term, not mine), refers to the lowest percentage the individual owns in any of the companies being tested. So, if Owner A has 25% of Company 1 and 10% of Company B, Owner A's actual ownership is 25% and 10%, respectively, but Owner A's identical ownership is 10% with regard to the test. If there was a third company being tested, and Owner A had 5% of that company, Owner A's identical ownership would be 5%. To be a controlled group, you add up each owner's identical ownership in the companies being tested, and the total of the identical ownership percentages must be more than 50%.
401(k) plan covers Company A with six owners. Three of those owners also own Company B. On 08/31/2009, one of the Company A owners passes away, leaving five owners that now have a controlled group with Company B due to the like ownership of 50% or greater in both companies. Company A maintains the 401(k) plan, and has a 07/31 fiscal year end. Company B has a SIMPLE plan and maintains a 12/31 year end. We were planning on including the Company B employees in the Company A document effective with the 08/01/2010 start of the plan year.
Q: Is it correct that the two companies are a controlled group? I need to be sure of that before I can make any recommendations to the client.
A: The common ownership must be at least 80% for the employers to be a controlled group. Based on the information provided, this is not a controlled group; common ownership is only 60%. I'm assuming the ownership percentages are the same for each owner.
Q: I should clarify — the identical ownership is over 50% (54.32%) between the five owners, and the common ownership is more than 80% (88.88%) between the same five owners:
It is my understanding that since the common ownership by 5 or fewer was greater than 80%, and the identical ownership was at least 50%, it was a controlled group.
A: Your understanding is correct. However, only individuals who have ownership in both Company A and Company B are included in the group of five or fewer individuals (section 1.1563-1(a)(3)(ii)(C)). Disregarding Owners 4 and 5, we have common ownership of only 54.32%; the two companies do not comprise a controlled group.
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