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Can I add an adopting employer after year end?


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Hi

New plan was signed/adopted by 12/31/2020, sponsored by sole-proprietor aka husband. Now they want to add another sole-proprietor aka wife for 2020 as an adopting employer.

Can this be done retroactively?

Thanks

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49 minutes ago, msmith said:

This question was asked of Derrin Watson and Ilene Ferenczy. They indicated that it could only be done via VCP submission.

Ugh. So start a plan for 2020 and merge it into the current plan and become a participating employer.

What one can do this way, one should be able to do the other way and save the client money.

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15 hours ago, Bill Presson said:

What one can do this way, one should be able to do the other way and save the client money.

Yeah.  And I'm not sure I agree that it can't be done.  Did Dennis and Ilene have a cite(s) or were they just being cautious?

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1 hour ago, Bird said:

Yeah.  And I'm not sure I agree that it can't be done.  Did Dennis and Ilene have a cite(s) or were they just being cautious?

I didn't hear that or at least don't remember it specifically. But Derrin and Ms Ilene are pretty reputable. 😀

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19 minutes ago, RatherBeGolfing said:

Im pretty sure this came up during ASPPA All Access as well, with the answer till being VCP.  I think it was either Heather or Kelsey.

Okay. We'll see what she says. If we don't like her answer, I'll reach out to Ms Heather and Ms Kelsey.

😀

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Bill Presson asked me to weigh in on this, Derrin and I are being cited quite a bit.  Nice to hear you all thinks so well of us.  :)  We appreciate it.

So, the starting point is the language of the law (imagine that! Ain't that just like a lawyer?):

 

This is a new paragraph under Section 401(b):

 

2) Adoption of plan.--If an employer adopts a stock bonus,

    pension, profit-sharing, or annuity plan after the close of a

    taxable year but before the time prescribed by law for filing the

    return of the employer for the taxable year (including extensions

    thereof), the employer may elect to treat the plan as having been

    adopted as of the last day of the taxable year.''.

 

So, when I read that, I thought, "Well, all it talks about is the employer adopting a plan.  Whether it is a multiple employer plan or a single employer plan, all the company is doing is adopting a plan.  So, I think adoption by the tax return due date is fine."

Derrin, however, put on his "Controlled Group" hat and pointed out that, if the Husband company and the Wife company are part of a controlled group, then the Husband company (on behalf of the "employer," which is both companies combined) already adopted the plan.  The problem here is that the Wife company failed to adopt a participating employer agreement under the plan. This potentially falls out of the language above and becomes a different situation - not a nonadoption at all, but a failure of the plan to be drafted to include the employees of the Wife's company.  That arguably is a required AMENDMENT of an existing plan, not an adoption of a new plan, and is required to be adopted by the end of the year.  And, as the amendment will not benefit all employees, it is likely ineligible for self-correction and must go through VCP.

Remember that the Husband's company and the Wife's company are not necessarily part of a controlled group.  The "noninvolvement exception" can break a controlled group if the spouses each own their own companies and (a) neither spouse has ownership in the entity owned by the other spouse; (b) neither spouse is a director or employee or participates in the management of the other spouse's company; (c) the spouses have no involvement in the other's company; (c) no more than 50% of the company's gross income is from passive investments, such as royalties, rents, interest, dividends, and annuities; and (d there are no restrictions limiting the spouse's ability to dispose of his/her ownership in favor of the other spouse or their minor children.  The noninvolvement exception does not help break the controlled group if you are in a community property state and the business is community property (so that each spouse under state law actually owns 50% of the other's company, thus overriding the noninvolvement exception) or if the couple has any minor children (in which case each spouse's ownership attributes to the minor child and the bambino is deemed to own 100% of both companies).

So, when all is said and done, if you are dealing with spouses, you might be better off doing the "separate adoption and later merge" method, distasteful as such a "form over substance" approach is.  If we know anything after our collective years practicing in this area, the IRS tends to be very detailed in the way it applies statutory and regulatory language, thereby commonly promoting form over substance.

Thanks again for letting me weigh in on Derrin's and my behalf.

Best to all --

Ilene

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  • 4 months later...
  • 1 month later...

Hi all!  We've dealt with this issue many times, often in connection with company acquisitions and have always said that a VCP is necessary given the prior EPCRS requirement that the corrective amendment benefit all participants.  Now that "correction by plan amendment" has been expanded by the IRS via Rev. Proc. 2021-30 in July to eliminate the requirement that a corrective plan amendment benefit all participants, I'm wondering if folks on this thread now believe that the early inclusion failure described above can in fact be self-corrected by plan amendment.  I think it is a more than reasonable conclusion.  Thoughts?      

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