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A- Business Organization
A-1 Q: If Employer A is sold to Employer B, what happens to Employer A's 401(k) plan?
A: Distribution of elective contributions to all participants is
permitted upon termination of a 401(k) plan resulting from the sale of "substantially all" (at least 85
percent) of the employer's assets. (Employer B may choose to continue the old plan.)
This is also the case if an employer sells its interest in a subsidiary that employs the plan participant.
A-2 Q: Can
a public employer or a nonprofit entity offer a 401(k) plan? -TOP
A: A state or local
government may maintain a 401(k) plan only if the plan was adopted
before May 7, 1986; since that date, state or local governments have
been prohibited from adopting 401(k) plans. Starting in 1997, a
nonprofit employer may institute a 401(k) plan. Prior to 1997,
nonprofits were prohibited from adopting 401(k) plans as of July 2,
1986.
A-3 Q: Are 401(k) plans appropriate for unincorporated businesses?
-TOP
A: Yes. Unincorporated businesses may use 401(k) plans as a benefit program for employees. The calculations involved are more difficult, since the compensation of the self-employed individual (either a sole proprietor or partner) is reduced by the contributions made on behalf of common-law employees. Also, the self-employed individual's compensation must be reduced by one half of the Social Security contribution (SECA deduction).
A-4 Q: What are the considerations in designing a 401(k) plan for a partnership?
-TOP
A: Complex rules govern partnerships that adopt 401(k) plans. In fact, the
final regulations under Code Section 401(k) require that any plan that
directly or indirectly permits a partner to vary the amount of contributions
on his or her behalf will be considered a cash or deferred arrangement. The
implications for a partnership are quite significant:
1. The annual contribution for each partner is subject to the 401(k)
deferral cap of $10,500 (in 2000).
2. For plan years beginning after December 30, 1997, matching contributions
on behalf of each partner are no longer treated as elective deferrals,
subject to the 2000 deferral cap of $10,500.
3. Nondiscrimination testing must be performed.
4. Each partner must be 100 percent vested.
Thus, in designing a plan for a partnership, it is critical that the
partners decide whether contributions should be variable for each partner.
If contributions will be variable, a 401(k) plan is the only design
available, with the resulting reduction in total contributions allocable to
the partners.
A-5 Q: Qualified Separate Lines of
Business (QSLOBs)
-TOP
A: Generally, all employees of corporations that are members of the
same controlled group of corporations and all employees of trades
or businesses under common control are treated as employed by a
single employer for purposes of applying nondiscrimination and
other qualification requirements. Similarly, all employees of members of an affiliated service group are considered employed by a single employer. Generally, the minimum participation rules, with
respect to plan years of defined contribution plans beginning before
1997, and the minimum coverage rules (discussed in chapter 10) are
applied only after the application of these controlled group and
affiliated service group provisions. There is an exception to this general rule, however, in the case of the controlled group rules. If an
employer operates two or more qualified separate lines of business (QSLOBs), the minimum participation and coverage rules can be applied separately to each
QSLOB.
A-6 Q: What is a qualified separate
line of business?
-TOP
A: A qualified separate line of business (QSLOB) is a line of business that is also a separate line of business and that meets the following requirements:
1. The separate line of business has 50 employees.
[Treas Reg § 1.414(r)-4(b)]
2. The employer notifies the IRS on Form 5310-A that it is applying the QSLOB rules.
[Treas Reg § 1.414(r)-4(c)]
3. The separate line of business passes administrative scrutiny. [Treas Reg § 1.414(r)-1(b)(2)]
A-7 Q: What is a line of business?
-TOP
A: A line of business (LOB) is a portion of the employer identified by the property and services sold to customers in the ordinary course of the conduct of a trade or business. [Treas Reg §§ 1.414(r)-2(a), 1.414 (r) -2 (b) (2)]
A-8 Q: Must an LOB provide only on type or related types of property and services?
-TOP
A: No. The employer may combine dissimilar types of property or services within one LOB. [Treas Reg § 1.414(r)-2(b)(3)(ii)]
Example. Employer A is a domestic conglomerate engaged in
the manufacture and sale of consumer food and beverage products and the provision of data processing services to private
industry. Employer A also owns and operates a regional commuter airline, a professional basketball team, a pharmaceutical
manufacturer, and a leather-tanning company. Employer A
apportions all the property and services it provides to its customers among
three LOBs, one providing all its consumer food and beverage products, a
second providing all its data processing services, and a third providing all
the other property and services provided to customers through Employer A's
regional commuter airline, professional basketball team, pharmaceutical
manufacturer, and leather-tanning company. Even though the third LOB
includes dissimilar types of property and services that are otherwise
unrelated to one another, Employer A is permitted to combine these in a
single LOB. Thus Employer A has three LOBs.
A-9 Q: What is a separate line of business?
-TOP
A: A separate line of business (SLOB) is an LOB that is organized and operated separately from the remaining businesses of the employer.
[Treas Reg § 1.414(r)-3(a)] A SLOB must meet all four of the following requirements:
1. The LOB must be formally organized as a separate organizational unit or group of separate organizational units. An organizational unit is a corporation, partnership, division, or other unit having a similar degree of organizational formality.
[Treas Reg § 1.414 (r) -3 (b) (2)
2. The LOB must be a separate profit center or group of separate profit centers.
[Treas Reg § 1.414(r)-3(b)(3)]
3. The LOB must have its own, separate workforce. [Treas Reg § 1.414(r)-3(b)(4)]
4. The LOB must have its own, separate management. [Treas Reg § 1.414(r)-3(b)(5)]
A-10 Q:
Must business entities under common control be aggregated as a single employer when applying the
nondiscrimination and other qualification requirements?
-TOP
A:
Yes, provided the entities meet the definition of a controlled group as set forth in Code Sections 414(b) and 414(c).
A-11 Q:
How many kinds of controlled groups are there?
-TOP
A:
In general, there are two kinds of controlled groups:
1. A parent-subsidiary controlled group; and
2. A brother-sister controlled group.
[Treas Reg §§ 1.414(c)-2(a), 1.1563-1(a)]
A-12 Q:
What is a controlling interest?
-TOP
A:
For a corporation, a controlling interest means ownership of stock possessing at least 80 percent of the
total combined voting power of all classes of stock entitled to vote, or at least 80 percent of the total
value of shares of all classes of stock. In the case of a trust or estate, it means ownership of an actuarial
interest of at least 80 percent of the trust or estate. Finally, in the case of a partnership, a controlling
interest means ownership of at least 80 percent of the profits or capital interest of the partnership.
[Treas Reg §§ 1.414(c)-2(b)(2), 1.1563-1(a)(2)(i)]
Example. The ABC Partnership owns stock possessing 80 percent of the total combined voting power of all the
classes of stock of S Corporation entitled to vote. S Corporation owns 80 percent of the profits interest in
the DEF Partnership. The ABC Partnership is the common parent of a controlled group consisting of the ABC
Partnership, S Corporation, and the DEF Partnership. The result would be the same if the ABC Partnership,
rather than S Corporation, owned 80 percent of the profits interest in the DEF Partnership.
A-13 Q:
What exactly is meant by "non-profits do not deduct their 401(k)contributions"?
-TOP
A:
The conventional "for-profit" company pays income tax based on it's taxable income (the
money it takes in, minus the expenses incurred in conducting it's business).
Contributions to a qualified plan are deductible from the company's income,
meaning that the income subject to taxation is lowered by the amount
contributed to the qualified retirement plan.
Non-profit organizations do not pay a tax on their income, because
non-profits are barred from making profits. As a result, 401(k)
contributions cannot, de facto, be deducted from a profit, because the is
never a profit to deduct the contribution expense from.
A-14 Q:
What is a successor plan?
-TOP
A:
For 401(k) plan purposes, a successor plan is any other defined
contribution plan (other than an employee stock ownership plan or a simplified employee pension plan),
maintained by the same employer, existing when the plan in question was terminated or within 12
months of the distribution of all assets from that plan. However, a plan is not a successor plan if
fewer than 2 percent of the employees eligible to participate in the terminated plan are (or were)
eligible to participate in another defined contribution plan at any time during the 12 months before or the
12 months after the termination.
A-15 Q:
What is the purpose of the controlled group rules?
-TOP
A:
The controlled group rules were designed under ERISA to
prevent employers from passing the coverage nondiscrimination test by hiring highly paid
employees to work for only one entity of a group, placing rank-and-file employees
in other entities, and maintaining pension plans only for the highly paid employees in the first entity. The nondiscrimination
coverage tests must be applied based on all employees employed by all entities within a controlled
group.
A-16 Q:
What is an affiliated service group?
-TOP
A:
An affiliated service group consists of a combination of an
organization whose principal purpose is to perform professional services (for example,
doctors, dentists or engineers) and at least one other related organization.
A-17 Q:
What is a Related Employer?
-TOP
A:
This is an employer that is part of a group of companies under common control and is a member of a controlled group or an affiliated service group. You should discuss the determination of Related Employers with your tax advisor or legal counsel.
A-18 Q:
Can a non profit company have a 401(k) plan with profit sharing?
-TOP
A:
YES
A-19 Q:
Are there any special ERISA requirements (filings, reports, special amendments, etc.) for a tax-exempt organization?
-TOP
A:
NO
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