Who’s in your Company’s Family Tree?

A family reunion is a great way to reconnect with family, catch-up with a long lost cousin and maybe even find relatives you didn’t even know about.   Whether it is a weekend picnic or a vacation destination there is a lot of planning that goes into a family reunion.  What can add to the complexity are distant family members and determining who you want to invite to the reunion (e.g., “do we really need to invite the crazy aunt?”)

As an employer it is also important to know who is in your family (what other organizations are you related to) for purposes of sponsoring a retirement plan and whether or not all organizations will sponsor the same plan.

Who is in your family?

The IRS refers to these family members as controlled group members and treats them as if they are a single employer for qualified retirement plan purposes. The main types of controlled groups are:

  1. Parent-Subsidiary Controlled Group: Organizations are connected through ownership of at least 80% with a common parent (including foreign companies)
  2. Brother-Sister Controlled Group: Five or fewer common individuals own 80% or more of each organization, and more than 50% of the organization taking into account only the ownership percentage of each individual which is identical for each organization
  3. A combination of A & B

What family members should be invited?

To prevent employers from establishing separate organizations to sidestep the nondiscrimination and minimum coverage rules, all employees of the controlled group are required to be treated as though employed by a single employer. However, similar to picking and choosing who to invite to the family reunion, you are not required to have all employers sponsor the same plan or all employees benefit under a plan, as long as you can meet the minimum coverage requirements.

Most commonly minimum coverage is met through the ratio-percentage test which, in general, compares the percentage of non-highly compensated employees to the percentage of highly compensated employees benefiting under the plan (including all employees of a controlled group). A plan’s ratio percentage must equal or exceed 70%. If your plan cannot pass the ratio-percentage test there are other more complex actions, such as average benefit test or qualified separate lines of business (QSLOB) that can be taken to satisfy the minimum coverage requirements. Failure to satisfy minimum coverage requirements can lead to plan disqualification.

For retirement plan purposes it is important to know who all of your relatives are, no matter how distant. If you want to sponsor separate plans by employer or employee group it is important to understand your company’s family tree demographics to avoid unwanted consequences. Don’t let your company’s crazy aunt throw away reaching your organization’s retirement plan goals.

Stay tuned for our next blog which will focus on issues related to inviting specific family members to participate in a single plan.

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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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