"One Participant Plan"

[thepensionmaven]

The  instructions to Form 5500-EZ make it pretty clear that IRS considers a plan wherein the husband AND wife together own 100%. 

What about  attribution - wouldn't the spouse of the oner be included as an owner?

The daughter of an owner if she is a stockholder?

Just wondering.

[BG5150]

Attribution doesn't count in those cases.

But in the case of husband and wife, it says that the owner/partners AND their spouses, so, in your case, the wife is automatically included--it doesn't matter how much she directly owns, if anything.

[C. B. Zeller]

If you'd asked me a week ago I would have agreed with BG. But the 2020 Form 5500-EZ was recently published and here is what the updated instructions say:

Quote

A one-participant plan means a retirement plan (that is, a defined benefit pension plan or a defined contribution profit-sharing or money purchase pension plan), other than an Employee Stock Ownership Plan (ESOP), which:

1. Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or

2. Covers only one or more partners (or partners and their spouses) in a business partnership (treating 2% shareholder of an S corporation, as defined in IRC §1372(b), as a partner); and

3. Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses).

The bit about 2% S-corp shareholders is new. Following the reference to 1372(b):

Quote

For purposes of this section, the term "2-percent shareholder" means any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.

Note the parenthetical - section 318 contains the attribution rules we are all familiar with for HCEs, key employees, etc. So I think you could read this to mean that a plan which covers only S-corp shareholders, their spouses, children, parents, and grandparents would be a one-participant plan eligible to file Form 5500-EZ.

[thepensionmaven]

Yes the definition was changed for 2020; previously the owner and spouse had to own the company.  If spouse had no ownership interest, the spouse was technically an employee and this would not be a one participant plan.

[Bird]

16 hours ago, thepensionmaven said:

Yes the definition was changed for 2020; previously the owner and spouse had to own the company.  If spouse had no ownership interest, the spouse was technically an employee and this would not be a one participant plan.

Wrong, and that wasn't the point of the apparent change in 2020.

[C. B. Zeller]

16 hours ago, thepensionmaven said:

the definition was changed for 2020

Was it though? Nothing changed in Title I of ERISA. The same plans that were subject to sec. 104 in 2019 should still be subject to it in 2020 (changes in the covered employee population notwithstanding). I would have to guess that this change in the instructions reflects an evolution in the IRS's and the DOL's interpretation of the law. I have to wonder about those plans that cover just the 100% owner of an S-corp and their child(ren) and were filing 5500-SF as a single employer plan for years - should they just switch over to 5500-EZ going forward? And can we read from this that such a plan is now, and has always been, exempt from all the requirements of Title I?

 

16 hours ago, thepensionmaven said:

If spouse had no ownership interest, the spouse was technically an employee and this would not be a one participant plan.

Did you mean if the child had no ownership interest? A plan that covered only the 100% owner and their spouse was always considered a one-participant plan.

[RatherBeGolfing]

28 minutes ago, Bird said:

Wrong, and that wasn't the point of the apparent change in 2020.

Agree on both points

[RatherBeGolfing]

3 minutes ago, C. B. Zeller said:

Was it though? Nothing changed in Title I of ERISA. The same plans that were subject to sec. 104 in 2019 should still be subject to it in 2020 (changes in the covered employee population notwithstanding). I would have to guess that this change in the instructions reflects an evolution in the IRS's and the DOL's interpretation of the law. I have to wonder about those plans that cover just the 100% owner of an S-corp and their child(ren) and were filing 5500-SF as a single employer plan for years - should they just switch over to 5500-EZ going forward? And can we read from this that such a plan is now, and has always been, exempt from all the requirements of Title I?

Here is what happened:

PPA §1103 directed The Secretary of the Treasury to modify the requirements for filing annual returns to ensure that one participant plans with assets of less than $250,000 need not file a return for that year.  §1103 also modified the definition of a “one-participant plan” to treat 2%  S-Corp shareholders as partners for annual filing purposes.

PPA §1103 did NOT amend the definition of an employee benefit plan.  DOL regs treat a shareholder (no S or C distinction) as an employee if there are two or more shareholders who are not spouses. 

As of 2019, IRS and DOL had not implemented or issued interpretive guidance in regards to the 2% shareholder issue, so the instructions had never been changed.  

We have Janice Wegesin to thank for the 2020 change we are discussing.  While she had retired a few years earlier, I had a chat with her about this back in 2019.  She reached out to an IRS contact who happened to be working on the 2020 instructions. 

[C. B. Zeller]

Thank you for the history lesson, and for your part in getting the instructions updated.

[Bird]

2 hours ago, RatherBeGolfing said:

As of 2019, IRS and DOL had not implemented or issued interpretive guidance in regards to the 2% shareholder issue, so the instructions had never been changed.  

All good info, thanks.  What is your take on the apparent change to attribute ownership, so an owner's children in a plan would not prevent it from being a "one-man" plan?

[RatherBeGolfing]

20 minutes ago, Bird said:

All good info, thanks.  What is your take on the apparent change to attribute ownership, so an owner's children in a plan would not prevent it from being a "one-man" plan?

I think @C. B. Zeller laid it out perfectly.  The 2020 Instructions reference 1372(b), which reference attribution under 318, so a 2% owner via attribution should be treated as a partner.

[RatherBeGolfing]

49 minutes ago, C. B. Zeller said:

Thank you for the history lesson, and for your part in getting the instructions updated.

Happy accident.  We were working on missing participants, but since Janice was the 5500 guru I asked her for advice on an S corp issue. She was always very generous with her time both before and after retirement.

[Bird]

19 hours ago, RatherBeGolfing said:

I think @C. B. Zeller laid it out perfectly.  The 2020 Instructions reference 1372(b), which reference attribution under 318, so a 2% owner via attribution should be treated as a partner.

Thanks again to both of you.  This is not insignificant.

[Dave Baker]

Could someone "restate" the question and the answer here, especially the takeaway point for TPAs?

[C. B. Zeller]

The key takeaway is that attribution is now taken into account when determining who is an owner of an S-corp for 5500 filing purposes. If everyone covered under the plan is deemed to own at least more than 2% of the S-corp sponsoring the plan, then the plan is considered a one-participant plan and should file Form 5500-EZ.

This only applies for S-corps and not any other types of organizations.

[C. B. Zeller]

Here is a followup question: given that the change in the law that precipitated the update to the instructions was actually effective 1/1/2007, could it have applied to to any 5500s filed between 2007 and 2019? More concretely, if you were now (in 2021) preparing a delinquent filing for, let's say 2016, for a plan that covered only the 100% owner of an S-corp, the owner's spouse and their child, would you submit under DFVCP with a 5500-SF, or under Rev Proc 2015-32 with a 5500-EZ?

[RatherBeGolfing]

5 hours ago, C. B. Zeller said:

Here is a followup question: given that the change in the law that precipitated the update to the instructions was actually effective 1/1/2007, could it have applied to to any 5500s filed between 2007 and 2019? More concretely, if you were now (in 2021) preparing a delinquent filing for, let's say 2016, for a plan that covered only the 100% owner of an S-corp, the owner's spouse and their child, would you submit under DFVCP with a 5500-SF, or under Rev Proc 2015-32 with a 5500-EZ?

Good question.  1103 didn't change the definition of an employee benefit plan, it directed the Sec of Treasury to modify the requirements for annual filing purposes.  I think you can argue it both ways, but I would stick to what the instructions were in 2016 and file DFVCP with an SF.

[rbates]

On 1/13/2021 at 7:07 AM, RatherBeGolfing said:

Here is what happened:

PPA §1103 directed The Secretary of the Treasury to modify the requirements for filing annual returns to ensure that one participant plans with assets of less than $250,000 need not file a return for that year.  §1103 also modified the definition of a “one-participant plan” to treat 2%  S-Corp shareholders as partners for annual filing purposes.

PPA §1103 did NOT amend the definition of an employee benefit plan.  DOL regs treat a shareholder (no S or C distinction) as an employee if there are two or more shareholders who are not spouses. 

As of 2019, IRS and DOL had not implemented or issued interpretive guidance in regards to the 2% shareholder issue, so the instructions had never been changed.  

We have Janice Wegesin to thank for the 2020 change we are discussing.  While she had retired a few years earlier, I had a chat with her about this back in 2019.  She reached out to an IRS contact who happened to be working on the 2020 instructions. 

 A plan covering only 2% shareholders of an S-Corp and filing on 5500-EZ would still be required to provide an SAR correct?

[RatherBeGolfing]

3 hours ago, rbates said:

 A plan covering only 2% shareholders of an S-Corp and filing on 5500-EZ would still be required to provide an SAR correct?

Yes, since the 2% shareholder treated as partner is only for filing purposes.

[Jakyasar]

Sorry if this was discussed before as now I have the following situation.

A quick follow up on this.

Employees are:

100% owner of S-corp

Spouse of the owner

Children of the owner, all over age 21.

5500-EZ is the way to file. No fidelity bond requirement.

Would PBGC coverage still apply?

[RatherBeGolfing]

4 hours ago, Jakyasar said:

Sorry if this was discussed before as now I have the following situation.

A quick follow up on this.

Employees are:

100% owner of S-corp

Spouse of the owner

Children of the owner, all over age 21.

5500-EZ is the way to file. No fidelity bond requirement.

Would PBGC coverage still apply?

I have been outlining this for a bit, and I think that your plan is an example of a plan that will file a Form 5500-EZ but is subject to both bonding and PBGC requirements (unless it is exempt as a small professional service plan) .  Remember, PPA 1103 simply modified the filing requirements, it did not amend the definition of an employee benefit plan (§2510.3-3).  It is still an employee benefit plan covered under Title I (the children are only treated as partners for filing purposes). 

§2510.3-3(c)

Quote

Employees. For purposes of this section and except as provided in §§ 2510.3-5(e) and 2510.3-55(d):

(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and

(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.

For PBGC coverage, a plan would be exempt if it is established and maintained exclusively for substantial owners of the plan sponsor.  

A participant is a substantial owner if, at any time during the last 60 months, the participant:

• Owns the entire interest in an unincorporated trade or business, or

• In the case of a partnership, is a partner who owns, directly or indirectly, more than ten percent of either the capital interest or the profits interest in such partnership, or

• In the case of a corporation, owns directly or indirectly more than ten percent in value of either the voting stock of that corporation or all the stock of that corporation

For substantial ownership purposes, we have to apply attribution under §1563 (not 318 that we applied for filing purposes above).  Under §1563, an individual who owns more than 50% directly or indirectly through other attribution  is considered as owning the stock owned, directly or indirectly, by or for his parents, grandparents, grandchildren, and children who have attained the age of 21 years. 

The adult children are not attributed the ownership of the 100% S-Corp owner.  The adult children are not substantial owners.  No PBGC exemption for covering only substantial owners.

I think I have worked out the differences between filing purposes, bonding requirements, and PBGC coverage correctly, but I would appreciate any input or corrections if I'm wrong. 

 

 

[Belgarath]

Now I've got a follow-up question. Plan has previously been filing a 5500-SF, 'cause based on the instructions, they weren't eligible to file the EZ.

Now in 2020, you file an EZ. Is the DOL going to give you a hard time (send letters or whatever) because you didn't file an SF? This could be a major PIA.

[RatherBeGolfing]

16 minutes ago, Belgarath said:

Now in 2020, you file an EZ. Is the DOL going to give you a hard time (send letters or whatever) because you didn't file an SF? This could be a major PIA.

It shouldn't, but it is possible that you will get a "reminder".  That said, the DOL is usually easy to deal with in this type of situation.  A quick phone call or even email will clear it up.

[Belgarath]

"A quick phone call" - with the DOL? I like your sense of humor. I haven't had good luck with phone calls to the DOL, so your experience has obviously been better.

I will grant you that they are generally quicker than the IRS...

Thanks for the response.

[RatherBeGolfing]

1 hour ago, Belgarath said:

"A quick phone call" - with the DOL? I like your sense of humor. I haven't had good luck with phone calls to the DOL, so your experience has obviously been better.

I will grant you that they are generally quicker than the IRS...

Thanks for the response.

We had some DOL inquiries on 5500's that were not filed by 10/15/20.  They were filed by the 1/15/21 hurricane extension.  In these cases,  they were all 5 minutes or less on the phone.  EZ vs SF should be similar I think.