Sometimes, retirement plan compliance can feel like an episode of “Stranger Things” and navigating the Upside Down. But have no fear – EGPS is here! We’re experts in handling all those mysterious cases that might leave you feeling like Will Byers in Season 1. Whether it’s dealing with unusual plan designs, mergers and acquisitions, IRS audit support, or testing complexities, we’ve got the expertise to bring your retirement plans back to normal.
One of these challenges? Aggregated coverage testing for multiple plans of an employer or multiple employers! See an explanation of this complicated scenario and how EGPS can turn this Demogorgon-sized challenge into smooth sailing.
A ride through Hawkins: Aggregated coverage testing background
EGPS has been engaged many times (more than Eleven) by employers who need aggregated coverage testing completed. One of the more complex areas of retirement plan administration is performing coverage testing for multiple plans of an employer, or multiple employers, who must be combined from a coverage and nondiscrimination perspective. This includes employers who are part of a controlled group or an affiliated service group of businesses. Even though the businesses are separate and may even be unrelated, due to common control (i.e., same parent company) or a business relationship, testing must be satisfied together.
Running up that hill: Common problems
Often, the testing requirements are realized too late. There may have been a change in ownership, a new business created, or a merger or spin-off situation that changes a business’ controlled group status. Additionally, there could’ve been a reason to establish a new plan that creates a need for specialized testing.
We commonly see parent companies that own multiple businesses that are not related to one another outside of ownership. Each business has its own retirement plan and its own unique needs and objectives. Due to the retirement plan rules placed upon them, however, the multiple plans must pass coverage on an aggregated basis.
Friends don’t lie, and neither does our retirement plan compliance team: Working through problems
Each plan can be tested for coverage separately. Or, if certain conditions are met, they can be combined into one test. But even if they are tested separately, all employees of the employer group need to be included in the test. Each plan that can pass coverage on its own can also test for nondiscrimination on its own (without factoring in the other employer’s employees). Plans that can test for nondiscrimination separately can provide unique benefits, rights and features in the plan without impacting the other plan(s). But if two or more plans must combine to satisfy coverage, they must also combine for nondiscrimination. That is the kicker.
Often this testing is completed in anticipation of a requirement to combine for testing in a future year. This is done for illustrative purposes to determine what the testing results may look like so that plan design decisions can be made in advance of this. Could one plan be safe harbor, but not the other? Could one plan provide for matching contributions if the other does not? In situations of business mergers or acquisitions that impact the employer group, there is a coverage testing transition period which allows each plan to be deemed to satisfy coverage for one to two years. This allows the employer to complete this analysis and make decisions on how to move forward – like whether it makes sense to merge the plans into one or retain multiple plans.
The testing results can be tricky to predict. Demographic changes, like the addition of employees, the loss of employees, and changes in compensation and deferral amounts can all impact the results. But finding out too late the plan failed testing can be quite costly and cumbersome to fix.
Like a shining Lite-Brite beacon of hope: Our retirement plan compliance experts can help!
EGPS can help by completing the testing and analysis and providing recommendations of options to move forward. Have a strange situation you’d like our retirement plan compliance team to help with? Fill out the form below and we’ll reach out with more information!
