The Hidden Pension Trap - The Aggregation Rules
In this issue:
One of the primary objectives of the qualified plan rules is to make the tax advantages contingent upon covering a significant number of the nonhighly compensated employees. As this goal could be thwarted by creating separate legal entities for the highly compensated and nonhighly compensated employees, a complex set of rules has evolved concerning the aggregation of related employers for purposes of the minimum coverage rules and other qualified plan requirements.
Unnoticed, these aggregation rules can cause serious negative ramifications. Let's look at an example: Jean the pension consultant goes to visit her client Exterminator, Inc. that sponsors a profit sharing plan. When she arrives, she also sees the name of Bug Analysis, Inc. on the door. Immediately she becomes concerned, since she knows that the plan only covers employees of Exterminator, Inc.
She discovers that both companies are wholly owned by the same two individuals. Since this is a situation in which the employees must be aggregated, the profit sharing plan could be disqualified if it cannot satisfy minimum coverage after counting the excluded employees of Bug, Inc.
As failure to identify required aggregation can result in plan disqualification, employers need a basic understanding of these rules.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.