PensionPro

From the preamble to the final 401(k) regs: One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual’s earned income as being currently available on the last day of the individual’s taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner’s draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual’s actual earned income for the relevant period.

In this context I do not believe it matters which corp exceeds the 10% revenue threshold. IRC Section 415 relates to annual addition limits not to determining related employer status. For this affiliated services group determination, the ownership interest requirement is only 10%. [iRC 415(h) provides the "more than 50%" ownership standard. This applies to determining annual addition limits under IRC section 415, not to determining related employer status. According to §1.414(m)-3(4), all members of an affiliated service group are treated as a single employer for determing 415 limits.]

The 2 corporations are not part of a controlled group. However ... They MAY still be considered an affiliated service group. If the revenue from performing services for the related company is less than 5% of the total revenue from performing services then you are unlikely to have an affiliated service group. If the revenue from performing services for the related company is at least 10% of the total overall revenue, then you are likely to have an affiliated service group. This is a very fact-specific determination. If the results are unclear since there is a vast gray area, you may need to engage the services of an ERISA attorney and/or obtain a determination from the IRS.

Hope this is what you are looking for ... Plan_Assets_Final_Rule.pdf

Who owns the other 50% of the C-Corp?

This discussion will be helpful: http://benefitslink.com/boards/index.php?showtopic=44993

I believe the extended due date for partnership returns is 9/15.

I think there was a similar thread not too long ago ... http://benefitslink.com/boards/index.php?showtopic=47994

According to IRC §413©(6), each applicable limitation provided by section 404(a) shall be determined as if each employer were maintaining a separate plan. An employer may generally speaking not deduct contributions made on behalf of individuals who are not considered its common law employees.

Chapter 1 of Publication 519 may be helpful.

I am not sure of the answer here. But the regs say that a contribution on behalf of a self-employed individual is treated as satisfying section 162 or 212 if it is not in excess of the individual’s earned income for the year, determined without regard to the deduction allowed by section 404 for the self-employed individual’s contribution. I would tend to say that he can make $16,500 deferrals and $2,902 PS. Or he can make $22,000 deferrals and $152.22 PS. I would be curious to hear other opinions.

This is the way I see it ... The fact that they have net earnings from self employment indicates services were performed or at least the accountant believes services were performed. If the services were performed in 2010, it is 415 comp for 2010. Of course you will need to check the plan doc. If they are receiving payment for services rendered in 2009 (which seems to be the case) I would think you have 415 comp if the payments were received by 03/15/2010. I think there is split opinion on whether it is 415 comp for 2009 or 2010.

That W-2 income is considered earned income, and he can set up a plan for the sole proprietorship. Caution: there is an exception for full-time insurance salespersons.

Here is a brief (it is not comprehensive) overview from publication 560: Net earnings from self-employment. For SEP and qualified plans, net earnings from self-employment is your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for one-half of your self-employment tax. Net earnings from self-employment do not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts. For the deduction limits, earned income is net earnings for personal services actually rendered to the business. You take into account the income tax deduction for one-half of self-employment tax and the deduction for contributions to the plan made on your behalf when figuring net earnings. Net earnings include a partner's distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). It does not include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners are not net earnings from self-employment.

Yes you can allocate $33,500 PS. Your catchup contributions are 1) 402(g) catchup of $4,500 2) ADP catchup of $400 3) 415 catchup of $600

It is considered an in-service distribution subject to the 5-year look back. I don't know if there is anything specific in the 416 regs, but this is based on IRS comments at ASPPA conferences.

Yes. Our Corbel VS doc states under the definition of 414(s) compenstion that "an employer may further limit the period taken into account to that part of the Plan Year or calendar year in which an Employee was a Participant in the component of the Plan being tested."

Maybe this helps, maybe not. Sec. 6.02(4) of Rev Proc 2008-50 states that corrective allocations and earnings come from employer contributions (or forfeitures) and that the normal rules of section 404 apply.

§1.410(b)-6. Excludable employees (d) Collectively bargained employees-- (1) General rule. A collectively bargained employee is an excludable employee with respect to a plan that benefits solely noncollectively bargained employees. If a plan (within the meaning of §1.410(b)-7(b)) benefits both collectively bargained employees and noncollectively bargained employees for a plan year, §1.410(b)-7©(4) provides that the portion of the plan that benefits the collectively bargained employees is treated as a separate plan from the portion of the plan that benefits the noncollectively bargained employees. Thus, a collectively bargained employee is always an excludable employee with respect to the mandatorily disaggregated portion of any plan that benefits noncollectively bargained employees.

Defined benefit feature and separate account feature. The defined benefit feature of an employee's benefit under a defined benefit plan and the separate account feature of an employee's benefit under a defined contribution plan are section 411(d)(6) protected benefits. Thus, for example, the elimination of the defined benefit feature of an employee's benefit under a defined benefit plan, through transfer of benefits from a defined benefit plan to a defined contribution plan or plans, will violate section 411(d)(6). § 1.411(d)-4 Q&A3(a)(2)

What is the authority for the 10% limit?

If the employee is not terminated and receiving pay, the employee is eligible to participate. If the employee is not terminated and not receiving pay, the employee is eligible to participate upon return to service. If the employee is terminated, treat the employee as you would any other terminated employee.

Yes, the earned income and W-2 amounts are aggregated.

Please read my post in the right context, there are no misquotes. I referred to a principle and used an example. Furthermore, my recommendation was to make the correction, not to disregard it. Let's not miss the forest for the trees.

Practically speaking, one of the principles outlined in RP 2008-50 for EPCRS is that if the amount involved is insignificant, and is smaller relative to the costs of processing and administration, the plan sponsor can disregard those corrections. For example, the plan sponsor is not required to make corrective distributions of $75 or less, or to seek recovery of overpayment of $100 or less. My approach would be to have the payroll service make adjustments (i.e. withhold the additional amounts) in 2011, communicate it to those affected, document the correction, and move on to bigger and better things.