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Adopting Employer and contribution levels


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A client with a 401(k) plan has only 3 participants, consisting of himself as owner, his wife, and one rank and file employee.  I am just now finding out that the owner and the rank and file employee are employed by the sponsoring corporation, while the wife is technically employed by her own LLC. For many years all 3 of them received deferrals, Safe Harbor, and profit sharing contributions.  However, for 2017, they want to give only the wife the profit sharing contribution.  I say this is discriminatory and they can't do that.  The CPA says that because the wife's contribution is made by her separate LLC and not by the sponsoring corporation of the plan, it's ok for her to have a profit sharing contribution while the rank and file employee does not.

I am thinking that the sponsoring corporation and the LLC are a controlled group belonging to the husband and wife and that they are still running afoul of non-discrimination rules.  I am also thinking that a participating employer addendum to the plan's adoption agreement should have been in place for the LLC all these years.

1) Can they give the wife a profit sharing contribution and nothing to the rank and file employee and 

2) Can a retroactive participating employer agreement be created dating back to the time that the LLC started making contributions on her behalf?

Thank you for any comments!

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She should not be participating in the plan based on income from her LLC if there is no participating employer agreement in place.  If there is, then you'd still have to determine if they are a single employer plan (covering related employers) or a multiple employer plan (covering two distinct employers who are not members of a Controlled Group or Affiliated Service (or Management) Group.
You can then, perform your analysis on the non-discrimination testing.

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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@ETA Consulting LLC, thank you for your response.  I had pretty much come to the same conclusion.  

As far as I can tell, they are a controlled group.  The husband owns the sponsoring corporation, the wife owns her LLC.  By virtue of stock attribution rules, each other is deemed to own each other's company, to the best of my knowledge.

A participating employer agreement was prepared on a timely basis but was never returned to us, executed.  We will press the sponsor for a copy of that document.

Meanwhile, we are taking the position that if the wife who owns the participating LLC is getting a profit sharing contribution, then the lone rank and file employee has to get one too.  If we are wrong, we have erred in favor of the participant, which I hear is always the best policy!

@Bird, thank you for your response as well!

 

 

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You're right; given that you've substantiated the controlled group.  Since they are a controlled group, then they are treated as a single employer for non-discrimination purposes.  This issue falls squarely under the purview of a TPA; and not necessarily a CPA with no background in 401(a)(4) of the Internal Revenue Code.  Not intending to knock the CPA (then again, maybe I am), but I often find myself explaining to clients that "your CPA wouldn't know this because this is outside of his specialty).  
Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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@ETA Consulting, LLC    Again we are thinking alike!  I have to learn, even after years of experience in this field, not to be intimidated by CPAs.  They are great for what they do well, and that isn't qualified plans, normally speaking.  :)

Thanks!

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Husband owns 100% of his company, wife owns 100% of her LLC.   Why does control group come into play because of stock attribution?  The Monday fog hit me too.

I can see a control group if the husband and wife had minor children.  Otherwise, I see that the wife's LLC should be needing a participating employer agreement.

The lone employee would have to receive a profit sharing due to coverage issues, if owner gives a profit sharing.  I assume lone employee is NHCE.  The wife could get cut out of profit sharing and still pass coverage if they wanted to save a couple of dollars.....lol.

What am I missing on control group question?

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1 hour ago, Mr Bagwell said:

What am I missing on control group question?

You aren't missing anything.  You just picked it up as an issue (because it is).  I didn't bother to perform the controlled group analysis, but merely suggested that it's the first step for purposes of determining whether they would be a single employer plan or multiple employer plan.  Details are important. In many instances, 10 questions (e.g. 10 layers of determinations) are loaded into a single question.  We can address 8 out of the 10 and still end up with a worthless analysis that fails to consider everything; which is generally why you never rely on 'advice' received from an internet board :-)  
Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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IRC sec 1563(e)(5) exception might apply

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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