What are they? They're private equity firms. And, in their normal mode of operation, many of them constitute a controlled group of corporations within the meaning of Internal Revenue Code Section 1563(a)(1).
So? Bully for them, right. Actually, if we look more closely, it may be far more complicated than that when it comes to retirement plans. In the most typical situation, each portfolio company will maintain one or more qualified retirement plans. So, the controlled group maintains lots of qualified retirement plans. And, because private equity firms usually allow each portfolio company to operate autonomously, the proverbial left hand may not know what the proverbial right hand is doing.
Usually, in my experience, they are mostly or entirely defined contribution (DC) plans. That's good, but let's think about the compliance issues. Each DC plan needs to satisfy the coverage rules of Code Section 410(b) on a controlled group basis. Each plan needs to satisfy the benefits, rights, and features rules of Treasury Regulation 1.401(a)(4)-4 on a controlled group basis. Each plan that is not a 401(k)/(m) plan (or 403(b)) needs to satisfy amounts testing under Treasury Regulation 1.401(a)(4)-2 (or -3 for a DB plan) on a controlled group basis. Each plan that is subject to 401(k)/(m) may wind up needing to be aggregated with another like plan in the controlled group for testing purposes.
I'm going to simplify this a little bit, but here is the way that we might look at the compliance situation for a group of DC plans in a controlled group.
- Count up the number of nonexcludible (generally all that are at least age 21, have at least 1 year of service, are not covered by a collective bargaining agreement, and are not nonresident aliens) highly compensated employees (HCEs) in the controlled group. Let's call this number CGH.
- Do the same thing for the nonhighly compensated employees (NHCEs) in the controlled group. Let's call this number CGNH.
- For each plan, determine the number of HCEs and NHCEs, separately who are covered by that plan. For plan 1, we will call those numbers P1H and P1NH. For plan 2, let's call them, P2H and P2NH. You get the picture.
- Now, take the ratio (P1NH/CGNH)/(P1H/CGH). Is it at least 70%? Are the similar ratios for all of the other plans also at least 70%? In my experience, the answer is often no. If the answer is yes, you are in good shape. If it's no, you may have problems.
- At this point, you'll need to consider other issues such as plan aggregation, current year versus prior year testing methods, safe harbor designs, qualified separate lines of business (QSLOBs) and other equally wonderful concepts. You probably need an expert.
We could go on for pages and pages here. These situations often get ugly. The private equity company probably never thought about this stuff. Suddenly, the plans maintained by the companies that they own may have compliance problems.
In reality, when dealing with this type of organization, I've seen this issue more often than not. It's not part of the buying decision, it's not part of ongoing process, and frankly, the people completing (and signing) Forms 5500 for the various plans probably don't even realize the problem exists.
I've seen it. It's usually ugly. I can help.