Father currently owns two companies. Co. 1 is sponsor of a (k) plan and Co. 2 participates in that plan. Father will soon will sell 99% ownership of Co. 1 to his two sons (> 21). The once controlled group will no longer exist. This will occur 7-1-09. A couple of questions -

1. The intent is to avoid a multiple employer plan so Co. 2 doesn't want to co-sponsor the Plan but if they don't, would the Plan violate the exclusive benefit rule immediatey? Or does the 410(b) transitional rule provide any relief to dispositions such as this and permit participation by Co. 2 in Co. 1's Plan, without either treating it like a multiple employer plan or violating the exclusive benefit rule?

2. Assume Co. 2 is going to start a new plan and spin-off their assets from Co. 1's plan during the plan year. As far as ADP testing - would Co. 1's plan include the Co. 2 employees for the part of the year they participated in Co. 1's plan? Or would it be acceptable to test Co. 2 contributions made while participating in Co. 1 plan under the spin-off Co. 2 plan?

Thanks.

It may be close since the sale is on 7/1/09, but you may want to check out the exclusion (by reverse interpretation) in IRC Section 1563(b). If Co.2 was part of the controlled group for less than 50% of the number of days in the Plan Year, it can be excluded from the controlled group.