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You may want to point out to the owner that investing in real estate from inside a qualified plan does not have anywhere near the same preferential tax treatment she may get by personally directly investing in real estate. Taxable distributions from the plan generally are all subject to ordinary income tax rates and do not benefit from capital gains rates. I also hope she has no personal connection with the real estate in question that would make this a prohibited transaction.

I LOVE ESOPs! You can send them all my way. Paul's comments are spot on.

...but I think they are. If they paid SE tax on it then it should be plan compensation. Having said that, I was not aware that one could avoid SE tax on partnership profits, at least for a general partner. And as Paul I notes, there is a difference in treatment between a GP and LP. But I'm not a CPA. I have seen the boxes on the K-1 filled out so many different ways I would not necessarily rely on them. When in doubt, we press the CPA to tell us what they paid self-employment tax on and use that. Back to my original point, I don't believe there is a difference between someone reporting $120K of guaranteed income and no profits, versus no guaranteed income and $120K of profits (assuming SE tax was paid either way).

If you have different eligibility requirements for different classes of employees you encounter a BRF problem. Getting fancy with eligibility won't resolve your issue. It will add another layer of headache. When running 410(b), Otherwise Excludable Employees - those who have not met IRS statutory eligibility requirements - can be tested separately. Excluding interns as a class should therefore not pose a problem. . . . unless the 5 regular employees do not meet statutory eligibility requirements either. Let's assume the 5 regular employees do not meet statutory eligibility requirements, because the question of interns would otherwise not likely be an issue. As part of the initial plan design, in the event of a 410(b) failure, the document should provide the plan sponsor the option of: a boilerplate failsafe (which could be sweeping, and thus less optimal), or the option to retroactively amend the plan (-11(g) amendment) for the year of failure. As a default, we always choose the latter as our correction method. In choosing to retroactively amend the plan to correct a coverage failure, you can limit the number of individuals you bring in to meet coverage requirements. Start with your regular employees, and work your way toward a passing test for the year. While it may add an annual cost to plan administration (corrective amendment preparation), it allows the plan sponsor to cherry pick who they choose to bring in, and even how they pass coverage. Bearing in mind you can also pass coverage with ABPT, this may salvage the year in question as well. This is a broad overview, and I may be missing something. Generally speaking though, testing Otherwise Excludables separately in a situation like yours resolves the problem without having to jump through hoops.

Why not just spin off in 2024 when they are no longer a controlled group instead of creating potential compliance problems for both plans by doing it in 2023?

I don't see this example as being any more stern than those we've seen in the past. Keep in mind that each regional office can have a different letter in use. It was just a few years ago that the Chicago office got into trouble by sending a "very stern" letter, which caused some backlash - and they changed it. Our approach, by the way, is to ALWAYS accept an invitation from the DOL when they are so kind as to invite you to their party. A VFCP is generally not too difficult to prepare, and provided you give them the right information concerning the deposits, earnings deposits, and excise tax (whether paid to the plan under the exemption or to the IRS on a 5330), the no action letter is "cheap" insurance. ...just don't file every year or they'll think you are incapable of playing by the rules....

Well the SEP failed to meet the coverage requirements, so it's not deductible. Not being an ERISA plan I don't know that the employees have any claim for benefits. There is no provision for any offset between qualified plans and SEPs, maybe something could be negotiated with the IRS. In my experience clients and their advisors tend to let sleeping SEPs lie. Seems like a good time to repost this, I wrote it years ago (back when the 415 limit was $40K): Ode to SEPs At the ripe old age of 42, My CPA said this won't do, He told me I'm out of step, To cut my taxes, go start a SEP. Sent me to a TPA, he said Yep A SEP might work, but first let's see. Lo and behold, we have an ASG! He told me we could work around the ASG; But there would be attorneys fees, Determination letters and trustees, Not only that, I'd have to contribute for employees! But, wait, I have no employees, they work for XYZ, But the lawyer said the ASG Means those employees work for me! We'll design a plan, that will conform, Of course you'll have to file the 5500 form. I said OK, let's kill some trees, But before we do, please explain the fees. When he was done, I had to pee, Surely I could find simplicity. So I went online to explore Found SEPs, 401(k)s, and more, They needed my name and address and EIN But had no pesky questions about 414(b), (c) or (m). What about the IRS, would they find my SEP? They audited my return, said I did misstep, About my SEP they did not complain, But disallowed my green fees, oh the pain! My SEP grew and grew and I paid no fees Wrote a check every year for my 40 Gs. As for my employees, they did not know, For their retirement, they have nothing to show.