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14.3 Testing Frequencies (Daily, Quarterly, Annual) & Controlled Group Impacts
ASPPA Qualified 401 k
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1 Chapter 1: Plan Qualification Requirements
1.1 IRC §401(a) Core Qualification Requirements & Exclusive Benefit Rule 1.2 Written Plan Documents, Pre-Approved vs. Individually Designed Plans & Restatements 1.3 Anti-Alienation, Qualified Domestic Relations Orders (QDROs) & Claims Procedures
2 Chapter 2: Retirement Plan Types & Structures
2.1 Defined Contribution vs. Defined Benefit Fundamentals & Hybrid Cash Balance Plans 2.2 Profit Sharing, Money Purchase & 401(k) Cash or Deferred Arrangements (CODAs) 2.3 Other DC Designs: ESOPs, SEPs, SIMPLE IRAs, SIMPLE 401(k)s, 403(b)s & 457(b)s
3 Chapter 3: Eligibility & Participation Rules
3.1 Statutory Age and Service Conditions Under IRC §410(a) 3.2 Hours-of-Service Crediting vs. Elapsed-Time Method 3.3 Plan Entry Dates, Dual Eligibility & Computation Periods 3.4 Amending Plan Eligibility Requirements & Explaining Eligibility to Plan Sponsors
4 Chapter 4: Special Eligibility Provisions & Long-Term Part-Time Employees
4.1 Excludable Employee Classifications & Job Categories 4.2 SECURE 2.0 Long-Term Part-Time (LTPT) Rules (500 Hours / 2-Year Standard) 4.3 Breaks in Service, Re-Employment Rules & Service Re-Crediting 4.4 Service Across Employers: Predecessor Employers, M&A Transitions, Leased Employees & Independent Contractors
5 Chapter 5: Vesting Schedules & Forfeiture Handling
5.1 Statutory Vesting Schedules: 3-Year Cliff, 2-to-6-Year Graded & 100% Immediate 5.2 Calculating Years of Vesting Service, Computation Periods & Service Exclusions 5.3 Forfeiture Determination, Timing, Allocation Methods & Re-Crediting 5.4 Mandatory Full-Vesting Events, Vesting Schedule Amendments & the 3-Year Election
6 Chapter 6: Employee Contributions & Deferral Limits
6.1 Pre-Tax Elective Deferrals & Designated Roth 401(k) Contributions 6.2 IRC §402(g) Annual Limits, Age-50 Catch-Up & SECURE 2.0 Super Catch-Up 6.3 Voluntary After-Tax Contributions & Automatic Contribution Arrangements (ACA, EACA) 6.4 Rollover Contributions Into the Plan: Eligible Sources, Direct vs. 60-Day Rollovers & Invalid Rollovers
7 Chapter 7: Employer Contributions & Allocations
7.1 Employer Matching Contributions: Fixed, Discretionary & Tiered Formulas 7.2 Discretionary Profit-Sharing: Pro-Rata Comp-to-Comp & Permitted Disparity (Social Security Integration) 7.3 Age-Weighted Allocations, Cross-Testing / New Comparability & Allocation Conditions 7.4 IRC §415(c) Annual Additions Limits, Excess Corrections & §404 Deduction Caps
8 Chapter 8: Safe Harbor 401(k) Plan Design
8.1 Traditional Safe Harbor Formulas: 3% Nonelective vs. Basic and Enhanced Matching 8.2 Qualified Automatic Contribution Arrangement (QACA) Safe Harbor 8.3 Safe Harbor Notice Rules, Mid-Year Elections, Suspension & SECURE 2.0 Flexibility 8.4 Safe Harbor Advantages, Disadvantages & the Top-Heavy Exemption 8.5 Verifying Safe Harbor Contribution Compliance & Comparing Safe Harbor to Non-Safe Harbor Plans
9 Chapter 9: Participant Loans & Compliance
9.1 IRC §72(p) Statutory Loan Limits ($50,000 / 50% Vested Balance Calculation) 9.2 Loan Terms: 5-Year Amortization, Principal Residence Exception & Interest Rates 9.3 Loan Defaults, Cure Periods, Deemed Distributions vs. Plan Loan Offsets
10 Chapter 10: Plan Distributions & Distributable Events
10.1 Distributable Events: Severance, Death, Disability & Normal Retirement 10.2 In-Service Withdrawals, Hardship Distributions & SECURE 2.0 Emergency Access 10.3 IRC §72(t) 10% Early Distribution Penalty & Statutory Exceptions 10.4 QJSA and QPSA Survivor Annuity Rules, the DC Plan Exemption & Spousal Consent Administration 10.5 Distribution Restrictions by Contribution Source & Plan Termination Distributions
11 Chapter 11: Mandatory Cash-Outs, Taxation & RMDs
11.1 Mandatory Cash-Out Limits ($7,000 Threshold) & Automatic Rollover IRAs 11.2 Taxation of Distributions, 20% Mandatory Federal Withholding & Direct Rollovers 11.3 Required Minimum Distributions (RMDs) Under IRC §401(a)(9) & SECURE 2.0 (Age 73) 11.4 Distribution Tax Reporting: Form 1099-R Codes, Form 945, In-Kind Distributions & Net Unrealized Appreciation
12 Chapter 12: Compensation Definitions for Testing & Allocations
12.1 IRC §415 Statutory Compensation Definitions: W-2, Box 1 & Section 3401(a) 12.2 IRC §414(s) Safe-Harbor vs. Custom Compensation & Nondiscrimination Testing 12.3 IRC §401(a)(17) Annual Compensation Limit & Deemed / Partial Year Rules 12.4 Applying the Plan's Compensation Definition: Components, Payroll Mapping & Common Administrative Errors
13 Chapter 13: Highly Compensated Employee (HCE) Determination
13.1 IRC §414(q) Statutory Tests: 5% Owners & Compensation Lookback ($160,000 Threshold) 13.2 Top-Paid 20% Group Election & Determination Year Mechanics 13.3 Family Attribution Rules Under IRC §318 / §1563 in HCE Determination 13.4 Former HCEs, Short Plan Years & Non-Calendar-Year HCE Determination
14 Chapter 14: Minimum Coverage Testing: Ratio Percentage Test
14.1 IRC §410(b) Coverage Framework, Testing Group & Statutory Excludable Employees 14.2 Calculating Benefiting Participants & The Ratio Percentage Test (70% Standard) 14.3 Testing Frequencies (Daily, Quarterly, Annual) & Controlled Group Impacts 14.4 Deemed-Pass Situations & Correcting a Failed Coverage Test
15 Chapter 15: Minimum Coverage: Average Benefits Test & Aggregation
15.1 The Average Benefits Test: Nondiscriminatory Classification (Safe/Unsafe Harbor) 15.2 Average Benefit Percentage Test (ABPT) Mechanics & Calculation 15.3 Mandatory Disaggregation, Permissive Aggregation & Line of Business (SLOB) Rules 15.4 Otherwise Excludable Employees: When Disaggregation Rescues a Failing Test
16 Chapter 16: ADP and ACP Testing Fundamentals
16.1 Actual Deferral Percentage (ADP) Test: Eligible Participants & Included Deferrals 16.2 Actual Contribution Percentage (ACP) Test: Matching & After-Tax Contributions 16.3 Testing Standards: The 1.25 Test vs. 2.0 / 2% Spread Test & Prior Year vs. Current Year Elections 16.4 Why ADP and ACP Testing Exists & Which Plans Are Statutorily Exempt 16.5 Shifting Techniques: Moving Contributions Between the ADP and ACP Tests 16.6 Permissive Disaggregation & Restructuring to Pass the ADP and ACP Tests
17 Chapter 17: Correcting Failed ADP/ACP Tests
17.1 Calculating the Total Excess: Ratio Leveling vs. Dollar Leveling to Participants 17.2 Corrective Distributions to HCEs: Refund Calculations, Income Allocations & Withholding 17.3 Alternative Corrections: QNECs, QMACs (Bottom-Up vs. Pro-Rata) & Recharacterization to Catch-Up 17.4 Statutory Deadlines: 2.5-Month Rule, EACA 6-Month Window, §4979 10% Excise Tax & EPCRS Self-Correction 17.5 Switching Between Prior-Year and Current-Year Testing: Advantages, Limits & Anti-Abuse Rules
18 Chapter 18: Top-Heavy Testing & Compliance
18.1 Identifying Key Employees: Officers, 5% Owners & 1% Owners (> $150,000) 18.2 The 60% Top-Heavy Ratio: Determination Date, Valuation Date & Account Adjustments 18.3 Top-Heavy Minimum Contributions (3% Rule), Accelerated Vesting & Safe Harbor Exemption 18.4 Required and Permissive Aggregation Groups & Former Key Employees
19 Chapter 19: Government Reporting & Form 5500 Filings
19.1 Form 5500 Series: Form 5500, Form 5500-SF & Form 5500-EZ Eligibility 19.2 IQPA Independent Audit Threshold: SECURE 2.0 100-Participant Account Balance Rule 19.3 Filing Deadlines, Form 5558 Extensions, EFAST2 Mechanics, DFVC Program & Penalties 19.4 Form 8955-SSA: Reporting Deferred Vested Participants & Related Registration Filings
20 Chapter 20: Participant Disclosures & Statutory Notices
20.1 ERISA Title I Disclosures: SPD, SMM & SAR Timing and Content Requirements 20.2 Fee Disclosures Under ERISA §404(a)(5) & §408(b)(2), Plus Blackout Notices 20.3 Electronic Delivery Safe Harbors (2002 & 2020) & SECURE 2.0 Paper Statement Requirements 20.4 Which Service Providers Must Deliver Fee Disclosures & the Sponsor-Level §408(b)(2) Requirement
21 Chapter 21: ASPPA Professional Conduct & Ethics
21.1 ASPPA Code Overview: Precepts 1 through 6 (Integrity, Competence & Courtesy) 21.2 Conflicts of Interest (Precept 7), Confidentiality (Precept 9) & Work Product Control (Precept 10) 21.3 Professional Discipline, ASPPA Disciplinary Board & Fiduciary Boundary Issues
14.3 Testing Frequencies (Daily, Quarterly, Annual) & Controlled Group Impacts
Key Takeaways Explain This Topic AI
Treas. Reg. §1.410(b)-8 authorizes three testing frequency methods: the Daily testing method, the Quarterly testing method, and the Annual testing method; however, 401(k) CODAs and 401(m) matching plans are legally restricted to the Annual testing method.
Under the Annual testing method, the plan must account for every individual who was an employee of any controlled group or affiliated service group member at ANY time during the plan year, including mid-year hires and terminations.
Under the Single Employer Doctrine of IRC §414(b)/(c), an employer cannot insulate a plan from non-participating affiliates; excluding a sister company with substantial NHCEs from plan participation typically causes catastrophic coverage failure for the participating company's plan.
IRC §410(b)(6)(C) provides a statutory transition rule for mergers and acquisitions: the plan continues to be treated as satisfying §410(b) from the transaction date through the last day of the first plan year beginning after the transaction, provided pre-existing coverage is not significantly altered.
If a plan fails IRC §410(b), IRC §402(b)(4) imposes a severe sanction on HCEs: each HCE must include their entire vested accrued benefit in gross income, while NHCEs remain protected from immediate taxation.
Last updated: September 2026
14.3 Testing Frequencies (Daily, Quarterly, Annual) & Controlled Group Impacts
Note
The Operational and Structural Architecture of Coverage Compliance Minimum coverage testing under IRC §410(b) is not merely a year-end mathematical exercise; it is an ongoing statutory discipline that intersects directly with corporate ownership structure, workforce turnover, and corporate transactions. Understanding when coverage must be measured and who must be accounted for across complex organizational structures is essential for retirement plan professionals. Furthermore, when corporate acquisitions, spin-offs, or ownership shifts occur, administrators must navigate statutory transition safe harbors under IRC §410(b)(6)(C) to prevent unintentional disqualification.
A failure in minimum coverage testing carries the most penal consequences in the Internal Revenue Code. Under IRC §402(b)(4) , the tax shelter of the trust is shattered for Highly Compensated Employees (HCEs), triggering immediate personal taxation on their total accumulated vested account balances. Mastering testing frequency rules, controlled group dynamics, and corrective remedies is vital for passing the ASPPA QKA credential and protecting plan sponsors from fiduciary catastrophe.
Permissible Testing Frequencies: Treas. Reg. §1.410(b)-8
Treasury Regulation §1.410(b)-8 provides three administrative methods for determining whether a plan satisfies the minimum coverage requirements of IRC §410(b):
1. The Daily Testing Method: Treas. Reg. §1.410(b)-8(a)(1)
Under the daily testing method, a plan must satisfy the minimum coverage requirements on each and every day of the plan year .
Application : On each day, the plan must account for all individuals who are employees of the employer on that specific day.
Operational Reality : This method is mathematically and administratively onerous because daily workforce changes (daily terminations, new hires, status adjustments) would require continuous recalculation. It is almost never utilized in practice for standard retirement plans.
2. The Quarterly Testing Method: Treas. Reg. §1.410(b)-8(a)(2)
Under the quarterly testing method, a plan is treated as satisfying minimum coverage for the entire plan year if it satisfies IRC §410(b) on at least one day in each quarter of the plan year .
Representative Day Requirement : The single day selected within each quarter must be reasonably representative of the employer's workforce throughout that quarter.
Restrictions : Permitted for defined benefit plans and standalone employer profit-sharing plans. However, it is strictly prohibited for 401(k) and 401(m) plans !
3. The Annual Testing Method: Treas. Reg. §1.410(b)-8(a)(3)
Under the annual testing method, a plan must satisfy IRC §410(b) as of the last day of the plan year , taking into account all individuals who were employees of the employer at ANY time during the plan year .
Mandatory for 401(k) and 401(m) Plans : Under Treas. Reg. §1.410(b)-8(a)(3), the annual testing method is mandatory for any plan or plan component subject to IRC §401(k) (elective deferrals) or IRC §401(m) (matching or after-tax employee contributions).
Comprehensive Workforce Accounting : Because testing accounts for every employee who performed service at any point during the 12-month period, every mid-year hire, mid-year termination, leave of absence, and job transfer must be evaluated for eligibility and excludability.
Comprehensive Comparison: Testing Frequency Methods
The following table contrasts the three regulatory testing frequency methods:
- Feature Daily Testing Method Quarterly Testing Method Annual Testing Method
- Regulatory Reference Treas. Reg. §1.410(b)-8(a)(1) Treas. Reg. §1.410(b)-8(a)(2) Treas. Reg. §1.410(b)-8(a)(3)
Frequency Required Every single day of the plan year At least one day in each of the 4 quarters As of the last day of the plan year
Employees Counted Employees active on each specific day Employees active on the chosen quarterly test date All employees employed at ANY time during the year
- Permitted for 401(k)? NO (Treas. Reg. §1.410(b)-8(a)(3)) NO (Treas. Reg. §1.410(b)-8(a)(3)) YES (MANDATORY)
- Permitted for 401(m)? NO (Treas. Reg. §1.410(b)-8(a)(3)) NO (Treas. Reg. §1.410(b)-8(a)(3)) YES (MANDATORY)
- Permitted for Profit-Sharing? Yes Yes (Must be representative) Yes (Industry standard default)
Administrative Complexity Extreme (Daily census tracking) Moderate (4 discrete quarterly audits) High year-end effort; standard for TPA software
Controlled Group & Affiliated Service Group Operational Impacts
Under the Single Employer Doctrine of IRC §414(b), §414(c), and §414(m) , an employer cannot circumvent minimum coverage testing by segregating rank-and-file workers into an operating entity that offers no retirement benefits while establishing a generous retirement plan for owners inside a separate management entity.
The "Uncovered Sister Company" Case Study
Consider Dr. Evelyn Reed, who owns 100% of two separate corporations:
Reed Surgical Associates, P.C. (Entity A) : Employs Dr. Reed (HCE, compensation $350,000) and 2 medical assistants (NHCEs). Entity A sponsors the Reed Surgical 401(k) Profit-Sharing Plan, offering a 401(k) CODA, 4% match, and 10% profit-sharing allocation. All 3 employees participate.
Reed Medical Billing Solutions, LLC (Entity B) : Employs 20 billing clerks and administrative personnel (all NHCEs). Entity B offers no retirement plan. +---------------------------------------------------------------------------------------------------+
- | THE UNCOVERED CONTROLLED GROUP ENTITY TRAP |
- +---------------------------------------------------------------------------------------------------+
- | |
- | [ COMMON OWNER: DR. EVELYN REED (100% OWNERSHIP OF BOTH ENTITIES) ] |
- | |
- | ┌───────────────────────────────┴───────────────────────────────┐ |
- | ▼ ▼ |
- | [ REED SURGICAL ASSOCIATES, P.C. ] [ REED BILLING SOLUTIONS, LLC ] |
- | • 1 HCE (Dr. Reed) • 0 HCEs |
- | • 2 NHCEs (Medical Assistants) • 20 NHCEs (Billing Clerks) |
- | • Sponsors: 401(k) Profit Sharing Plan • Sponsors: NO RETIREMENT PLAN |
- | |
- | CONTROLLED GROUP ANALYSIS UNDER IRC §414(c): |
- | Because Dr. Reed owns 100% of both businesses, Entity A and Entity B constitute a |
- | Brother-Sister Controlled Group. They are legally treated as a SINGLE EMPLOYER. |
- | |
- | AGGREGATE WORKFORCE TESTING UNIVERSE: |
- | • Total Non-Excludable HCEs = 1 (Dr. Reed) |
- | • Total Non-Excludable NHCEs = 22 (2 from Surgical + 20 from Billing) |
- | |
- | COVERAGE TEST RESULTS FOR REED SURGICAL 401(k) PLAN: |
- | • HCE Benefiting % = 1 / 1 = 100.00% |
- | • NHCE Benefiting % = 2 / 22 = 9.09% |
- | |
- | RATIO PERCENTAGE = 9.09% / 100.00% = 9.09%! |
- | STATUTORY MINIMUM REQUIRED = 70.00% |
- | RESULT: CATASTROPHIC PLAN DISQUALIFICATION UNDER IRC §401(a)(3)! |
- | |
- +---------------------------------------------------------------------------------------------------+
As this case study proves, excluding an affiliate's non-excludable workforce from plan participation crushes the plan's Ratio Percentage. Dr. Reed's plan fails coverage at 9.09% , far below the 70.00% safe harbor. Without restructuring or expanding coverage to Entity B's employees, Entity A's plan cannot maintain tax qualification.
The M&A Transition Rule: IRC §410(b)(6)(C)
When corporate mergers, stock acquisitions, asset purchases, or dispositions occur, the composition of an employer's controlled group can change overnight. For example, if Corporation X acquires 100% of the stock of Corporation Y on October 1, Corporation Y's uncovered employees instantly enter Corporation X's controlled group, which could immediately cause Corporation X's 401(k) plan to fail minimum coverage mid-year.
To provide corporate stability and allow acquirers sufficient time to harmonize employee benefit programs, Congress enacted the statutory transition rule of IRC §410(b)(6)(C) .
The Transition Period Timeline
Under IRC §410(b)(6)(C), when an entity becomes or ceases to be a member of a controlled group under IRC §414(b)/(c) or an affiliated service group under §414(m), the minimum coverage requirements are treated as satisfied during the statutory transition period : +---------------------------------------------------------------------------------------------------+
- | IRC §410(b)(6)(C) M&A TRANSITION PERIOD TIMELINE |
- +---------------------------------------------------------------------------------------------------+
- | |
- | [ TRANSACTION DATE ] |
- | The exact date on which the acquisition, disposition, or merger legally closes. |
- | • Transition period BEGINS on this date. |
- | |
- | THROUGH |
- | |
- | [ THE STATUTORY END DATE ] |
- | The LAST DAY of the FIRST PLAN YEAR BEGINNING AFTER the date of the transaction. |
- | |
- +---------------------------------------------------------------------------------------------------+
Detailed Practical Timeline Example (Calendar Year Plan):
Transaction Date : July 15, 2025 (Acquisition closes).
Current Plan Year : January 1, 2025 through December 31, 2025.
First Plan Year Beginning After Transaction : January 1, 2026 through December 31, 2026.
Statutory Transition Period Expiration Date : December 31, 2026 !
Total Transition Relief : In this scenario, the employer receives 17.5 months of absolute statutory relief (July 15, 2025 through December 31, 2026) during which the pre-existing plans of both the buyer and the seller are protected from coverage failure caused by the acquisition.
Prerequisites for Transition Protection
To maintain transition relief under IRC §410(b)(6)(C), two statutory conditions must be satisfied:
Pre-Transaction Compliance : The plan must have satisfied IRC §410(b) immediately prior to the transaction.
No Significant Coverage Changes : Coverage under the plan must not be significantly altered during the transition period (other than by reason of the change in members of the group), and the plan terms must not be amended to significantly alter benefits.
Warning
The Post-Transaction Plan Amendment Trap : If an employer acquires a company and immediately amends the acquiring company's 401(k) plan to alter the contribution formula or exclude certain acquired divisions, the employer violates the "no significant change" condition! The statutory transition safe harbor is instantly forfeited , subjecting the plan to immediate coverage testing across the entire combined workforce retroactive to the transaction date.
Consequences of Failing Minimum Coverage Testing
Satisfying IRC §410(b) is an explicit statutory qualification requirement under IRC §401(a)(3) . If a plan fails coverage for a plan year and fails to correct the violation, the plan trust suffers revocation of its tax-exempt status under IRC §501(a) .
Traditional Plan Disqualification vs. IRC §402(b)(4)
Historically, plan disqualification penalized all participants: the employer lost tax deductions, the trust owed tax on earnings, and all employees faced immediate income taxation on their vested balances. Recognizing that rank-and-file employees had no control over plan compliance, Congress added IRC §402(b)(4) to establish a targeted, highly punitive penalty structure for coverage failures: +---------------------------------------------------------------------------------------------------+
- | IRC §402(b)(4) DISCRIMINATORY DISQUALIFICATION SANCTIONS |
- +---------------------------------------------------------------------------------------------------+
- | |
- | If a plan fails qualification SOLELY because it fails IRC §410(b) minimum coverage: |
- | |
- | [ TREATMENT OF NON-HIGHLY COMPENSATED EMPLOYEES (NHCEs) ] |
- | • NHCEs ARE STATUTORILY SHIELDED FROM TAXATION! |
- | • NHCEs do NOT include any part of their vested accrued benefits in gross income. |
- | • NHCE distributions continue to be eligible for tax-free rollover treatment under IRC §402(c). |
- | |
- | [ TREATMENT OF HIGHLY COMPENSATED EMPLOYEES (HCEs) ] |
- | • HCEs FACE DEVASTATING PERSONAL TAXATION! |
- | • Each HCE must include in gross income for their taxable year an amount equal to their |
- | ENTIRE VESTED ACCRUED BENEFIT (not just the current year's contribution) as of the close |
- | of the employer's taxable year! |
- | • In subsequent failed years, HCEs are taxed on increases in their vested accrued benefit. |
- | |
- +---------------------------------------------------------------------------------------------------+
- EPCRS & Retroactive Corrective Amendments: Treas. Reg. §1.401(a)(4)-11(g)
When an administrator discovers an IRC §410(b) failure following the end of the plan year, the employer can utilize the regulatory correction mechanism authorized under Treas. Reg. §1.401(a)(4)-11(g) and the IRS Employee Plans Compliance Resolution System (EPCRS, Rev. Proc. 2021-30 / SECURE 2.0):
The 9½-Month Rule : The employer may adopt a retroactive corrective amendment by the 15th day of the 9th month following the close of the plan year (October 15 for a calendar plan year).
Mechanics of Correction : The amendment must retroactively expand coverage to a sufficient number of non-benefiting NHCEs to achieve a passing Ratio Percentage (at least 70.00%).
Mandatory Funding : The employer must make full corrective contributions (plus lost earnings) for the newly covered NHCEs to place them in the financial position they would have occupied had they received allocations originally.
Common ASPPA QKA Exam Traps
Exam Trap 1: Attempting Quarterly Testing for 401(k) Plans : An exam question asks which testing method a plan administrator can elect for an annual 401(k) plan with elective deferrals. Options will list Daily, Quarterly, and Annual. Candidates select Quarterly to save administrative effort. Under Treas. Reg. §1.410(b)-8(a)(3), 401(k) and 401(m) plans MUST use the Annual testing method .
Exam Trap 2: Miscalculating the M&A Transition End Date : Exam items frequently describe a corporate acquisition occurring on April 1, 2025, for a calendar-year plan, and ask when transition relief under IRC §410(b)(6)(C) expires. Candidates mistakenly select December 31, 2025 (end of current plan year), April 1, 2026 (one year later), or 12 months post-sale. The correct statutory answer is December 31, 2026 —the last day of the first plan year beginning after the transaction date!
Exam Trap 3: Believing Separate Legal Incorporation Prevents Controlled Group Aggregation : Candidates often argue that because Company B is a legally distinct LLC with its own EIN, payroll system, and separate business operations, its employees cannot be included in Company A's coverage test. Under IRC §414(b)/(c), corporate formalities and separate EINs are completely disregarded if statutory ownership thresholds (80% / 50%) are satisfied.
Exam Trap 4: Taxing NHCEs upon §410(b) Failure : Exam questions test participant taxation when a plan is disqualified solely under §410(b). Candidates incorrectly state that all participants are taxed. Under IRC §402(b)(4), NHCEs are completely shielded from tax ; only HCEs must recognize their vested accrued benefits as taxable income.