Who’s in Your Company’s Family Tree – but Not in Your Plan?

My dad just turned 90 years old. We had many discussions prior to his big day about how to celebrate his milestone.  We went back and forth on how big he wanted this party to be.  In the end, my dad didn’t want to exclude anyone.  It turned into a big family reunion that became a big county reunion (about 300 people attended).  This included the long lost cousins and the “crazy” aunt that Niki Daumueller discussed in her last blog.

Is everyone invited?

As Niki stated, for retirement plan purposes as well, it’s important to know who all of your relatives are/who is in your company’s family tree, no matter how distant. The reason is, unlike family reunions or my dad’s birthday party, the IRS rules state you can’t exclude certain family members (a.k.a. controlled group members) unless certain rules are met – you must be fair!  These rules prohibit discrimination against nonhighly compensated employees (“NHCEs”).

To determine this “fairness” you start with the plan’s definition of an eligible employee. A plan can include all employees (including all controlled group members) or only those that meet a specific classification.  Commonly used employee exclusions are:

  • Hourly
  • Salaried
  • Bargained
  • Specific job titles
  • Specific locations
  • Not employed by the company sponsoring the plan
  • Covered by a transition period due to an acquisition/disposition

If the plan doesn’t cover all employees, it must be able to meet the minimum coverage requirements to prove it is being fair. As Niki’s blog addresses, this requires us to look at the ratio of NHCEs benefiting in the plan and compare that to the ratio of highly compensated employees benefiting in the plan.

Was anyone forgotten?

One of the most common errors we see is with forgotten controlled group members. Oftentimes the plan sponsor wasn’t aware of any other controlled group members.  This usually happens when there is a foreign parent company.  Another common mistake is the plan sponsor understood the plan to only cover its employees when the plan document was written to cover all controlled group members.

The consequence of making the above mistakes and not meeting the requirements usually involves making an unexpected (and sometimes large) contribution to the plan. And, that contribution typically is allocated to a group of NHCEs in the form of increased benefits or increased plan coverage.

Be careful. Be fair.

My dad didn’t need to worry about meeting these requirements, but with all of the corporate acquisition and disposition activity that’s taking place, you may need to. Accidental plan coverage can require an expensive fix.  Be sure to know who is in your company’s family tree – but not in your plan.  Be certain the right data is being used to prove the qualified plan requirements are being met.  And, as my dad did with his party planning, be fair.

Tyler Archer will discuss other ways a retirement plan must be fair in our next blog.

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Affiliation Disclosures

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

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