Tax-exempts' new sec. 401(k) plan eligibility may jeopardize affiliates' plans.

• Author: Buchbinder, Elizabeth

A legislative development providing employees of tax-exempt entities with greater access to retirement plans may threaten the qualified status of plans of those entities, for-profit affiliates. The Small Business job Protection Act of 1996 (SBJPA) repealed the Code provision that prohibits nongovernmental tax-exempt employers from maintaining Sec. 401 (k) plans; however, affiliated for-profit companies with cash or deferred arrangements under Sec. 401 (k) run the risk of violating the Sec. 410 (b) coverage tests after the SBJPA's effective date.

Under the Sec. 410 (b) coverage tests, a qualified plans coverage of an employer's nonhighly compensated employees must meet certain percentage requirements to be considered nondiscriminatory tory. In applying these tests, "employer" means the controlled group for affiliated service group) of employers. Treasury regulations provide that, for purposes of determining whether a Sec. 401(k) plan satisfies the percentage coverage tests under Sec. 410(b) for a particular year, employees of governmental or exempt entities not eligible to participate in a Sec. 401(k) plan may be treated as exclucible employees, provided that more than 95% of the employees eligible to participate m a Sec. 401 (k) plan benefit under die plan for that plan year.

Thus, prior to the effective date of the SBJPA, if a for-profit entity is a member of a controlled group for an affiliated service group) in which all other employers are exempt from tax, and such entity maintains a Sec. 410 (k) plan, for purposes of applying the Sec. 410(b) tests to the Sec. 401(k) plan, die employees of the tax-exempt entities can be excluded if more than 95% of the for-profit entity's employees...