Will.I.Am

I have a client who pays people who could be classified as independent contractors as statutory employees and issues them a W-2. Do these employees count towards the limit of determining if a plan sponsor has to do auto enrollment or not?

Do the ASG management group rules apply to businesses that are service businesses? For example, would it apply to car dealerships? Or so the recipient business who receives the services from a management company have to be a service based company?

I have a client who owns 40% of 3 car dealerships, the other 60% is owned by his father-in-law (30%) and uncle-in-law (30%). He then owns 100% of 4 other dealerships. He has two 401(k) plans that we administer, one plan covers the entities he owns 40% and the other plan covers the entities he owns 100%. With respect to this situation I have the following questions: 1. I have done controlled group analysis and have determined that the 3 dealerships he owns 40% are not part of the same controlled group as the entities he owns 100%; does this appear to be right? Am I missing anything? I don't think affiliated service groups applies since a car dealership isn't a service entity and I don't think a management group applies because he gets paid a W2 from each dealership, he doesn't have the dealerships pay a management company that he owns (also, I am not sure if it is a requirement for the business to be a service company to be part of a management group). 2. We have been allocating a profit sharing contribution for each plan and since I think both plans are unrelated he has a separate 415 limit in each one. One plan he does his max deferral and gets a match and maxes out to the 415 limit via profit sharing and then the other we just allocate a profit sharing contribution and max out to the 415 limit. However, he just turned 50 in 2022 so he is eligible for catch-up. My question is, if we had him fund the normal 402(g) limit (22,500 for 2023) to one plan without catch-up and then fund the catch-up (7,500) to the other plan, could he fund $73,500 to each plan? It seems wrong because he is basically using the catch-up limit twice (each plan would be using 7,500 of catch-up) but he isn't going over the 402(g) limit (he would only be funding 30,000 total in deferrals between both plans). Hopefully my questions make sense, let me know if I need to clarify anything. Thanks,

Thank you for the response!

I accidentally posted this in this Section, go to Retirement Plans In General and I posted this there which I feel is more appropriate.

I am looking at setting up two plans for a controlled group. The entity structure is as folllows: Company A is owned 100% by husband and Company A owns 100% of Company A1 and 70% of Company A2 (the other 30% are unrelated owners) Company A1 and A2 are restaurants and Company A is a management company. Company B is owned 100% by wife (married to husband above and husband and wife participate in all businesses) and Company B owns 100% of Company B1 and 100% of Company B2, Company B1 and B2 are restaurants and Company B is a management company. If we did one plan to cover all entities it would have enough participants to require an audit. What we are looking to do is have two plans (both plans would be designed the exact same) and Plan 1 would cover Company A and Company A1 and A2. Plan 2 would cover Company B and Company B1 and B2. By having two plans each plan would have less than 100 participants and neither one would need an audit. I have the following questions: 1. the affiliated service group rules don’t apply here since these entities are mainly restaurants, right? 2. Wouldn’t Plan 1 technically be a multiple employer plan because of the 70% ownership of company A2? (Doesn’t rise to 80%) 3. If Plan 1 is a multiple employer plan (which I think it is) can Plan 1 be permissively aggregated with Plan 2 for testing purposes (coverage and nondiscrimination)? Technically wouldn’t you just be aggregating Company A and A1 in Plan 1 with Company B, B1 and B2 in Plan 2 and company A2 would be tested separately? 4. Are there any risks to structuring two plans instead of having just one to avoid an audit?

I am looking at setting up two plans for a controlled group. The entity structure is as folllows: Company A is owned 100% by husband and Company A owns 100% of Company A1 and 70% of Company A2 (the other 30% are unrelated owners) Company A1 and A2 are restaurants and Company A is a management company. Company B is owned 100% by wife (married to husband above and husband and wife participate in all businesses) and Company B owns 100% of Company B1 and 100% of Company B2, Company B1 and B2 are restaurants and Company A is a management company. If we did one plan to cover all entities it would have enough participants to require an audit. What we are looking to do is have two plans (both plans would be designed the exact same) and Plan 1 would cover Company A and Company A1 and A2. Plan 2 would cover Company B and Company B1 and B2. By have two plans each plan would have less than 100 participants and neither one would need an audit. I have the following questions: 1. the affiliated service group rules don’t apply here since these entities are mainly restaurants, right? 2. Wouldn’t Plan 1 technically be a multiple employer plan because of the 70% ownership of company A2? (Doesn’t rise to 80%) 3. If Plan 1 is a multiple employer plan (which I think it is) can Plan 1 be aggregated with Plan 2 for testing purposes (coverage and nondiscrimination)? Technically wouldn’t you just be aggregating Company A and A1 in Plan 1 with Company B, B1 and B2 in Plan 2 and company A2 would be tested separately? 4. Are there any risks to structuring two plans instead of having just one to avoid an audit?

If the plan has elected the safe harbor rules for hardship distributions can the plan sponsor rely on employee certifications with respect to the amount to satisfy the financial hardship and the employees need for the hardship distribution? I want to make sure we are okay to just have them sign a certification statement without having to also request documentation proving the hardship.

My question is should you always get a tax identification number when you are setting up a new retirement plan? I setup a lot of new plans every year and a lot of them are with recordkeepers and my understanding is if the TIN isn't used the IRS will shut it down so a lot of times I haven't been getting a TIN and have just been using the EIN of the business. I know this is technically not accurate since the assets are not the employer's assets but from what I have seen I think this is quite common. Most recordkeepers I work with have never asked me for a Plan TIN for a plan and have just used the EIN of the business. I also setup a lot of solo 401(k)'s and have been doing the mega backdoor internal Roth conversion of after-tax employee money and these types of plans typically in my experience are setup in self-directed brokerage accounts so when I do the 1099 for the conversion I will have to have a TIN for the plan so these plans I have usually been applying for a plan TIN. Is it recommended to always get a plan TIN no matter what? Or from a practical standpoint can you just get one when you know you will use it on 1099's, etc.

Why are you trying to avoid aggregation? Can’t you still aggregate and just allocate a profit sharing contribution in one plan but allocate zero in the other? Am I missing something?

Our firm uses ftwilliam and as far as I know it can’t do restructured testing (breaking the plan into component plans and testing separately). I was wondering how other people were doing this testing? Do other software programs do it? Do you have to do the testing outside of a software program like in excel?

Thank you for the quick reply. I have a follow-up question. I have normally seen just a single self-directed brokerage (SDBA) account opened for Solo 401(k) plans where all contributions types are deposited into that single account (Pre-tax, after-tax, Roth deferral, Profit sharing, etc.). Is maintaining account balances using balance forward accounting for the different sources adequate enough if you are planning on doing after-tax employee contributions and converting to Roth; or, is it recommended to open up a separate SDBA account for Roth money, pre-tax money and after-tax money and transfer between them?

Assume you have a Solo 401(k) that allows after-tax employee contributions and in-plan Roth rollovers and you have pre-tax money and after-tax employee money. Can you do an in-plan Roth rollover/conversion and convert only the after-tax amounts and exclude the pre-tax amounts from the conversion?

Wouldn’t doing an amendment to make the employees somewhat vested instead of not vested at all be a step in the right direction? It would give the allocations “substance” and make it not as abusive? I know we are operating in the grey a little here but if I am going to rely on allocations given to non-vested participants who I know have terminated to give more money to the owners I remember reading somewhere that the allocation needs to have “substance” which from what I remember means they need to be somewhat vested in the money they are being allocated.

I am allocating them a profit sharing contribution to pass testing. I don’t have allocation conditions in the document so I can’t exclude them. It is only two people but one of them that have terminated I am relying on for general testing; however, they only have one year of vesting service earned and the plan uses a 2-6 year vesting schedule so they are 0% vested so I am allocating them money to give the owners more but they aren’t vested.

I am pretty sure the terminations were voluntary on behalf of the employee and not employer initiated. If this is the case then it wouldn't be a partial plan termination that would require 100% vesting, right? If this is the case then I could do an 11g amendment to increase vesting of the participants I am relying on in general testing (new comparability allocation)?

I have a plan where all the NHCEs who are eligible for profit sharing have terminated and are 0% vested. I am trying to max out the owner and his wife to their respective 415 limits via a profit sharing contribution using a new comparability formula which I can easily do; however, I have to give the employees a roughly 20% profit sharing contribution. Luckily, they didn’t get paid very much in the current year and the owner and his wife are getting over 95% of the employer contribution. I know I can’t rely on NHCEs for general testing if they don’t have some vesting. What are my options to make the employees somewhat vested so I can rely on them? I have heard of an amendment that you can make to give them testing? If you can do this, do you just list the employees names in the amendment and state what level of vesting you are giving them? Can you just give the employees you are relying on more vesting but exclude others?

That is what my thought was as well. Thank you.

However, assuming this was all done in January I’m still not sure about my original question.

Self employed individuals have an exception to the normal payment timing rules for making deferrals to ensure they have enough earned income. I think it would be reasonable to allow an exception for this as well since it is very similar to deferrals and I’m sure you could make your case with any auditor.

I’ll just share the husbands numbers. His Self-employment income is 120,189. One half of the self employment tax is 8,491.08. After deducting this his net earnings from self employment before his employer contribution to himself is 111,697.92. Multiply this by (.25/1.25) to get his maximum employer contribution of 22,339.58 making his earned income 89,358.34 (111,697.92 - 22,339.58). From his earned income he makes his 19,500 deferral to the plan. Between his deferral and employer contribution he has contributed 41,839.58. To max him to the 415 limit of 58,000 I want to do a 16,160.42 after-tax employee contribution. My question is does this come out of earned income like the deferral and leave the deduction limit at 25% of 89,358.34 (this equals my employer contribution of 22,339.58) or does it reduce earned income to 73,197.92 and in turn reduce my deduction limit. My software is having it reduce the earned income and then I fail the deduction limit test but I think you should treat the after-tax employee contribution similar to deferrals but I can’t find a definitive answer.

I have a partnership that is husband wife with no employees so it is a "one-participant" plan per the definition. We started a 401(k) plan for them in 2021 and are trying to max out their contributions to $58,000 each using elective deferrals, profit sharing and after-tax employee contributions. The husband's self-employment income on his K-1 was $120,189 and the wife's was $118,664. They each want to make a $19,500 elective deferral and a maximum profit sharing contribution and then they want to max the rest with after-tax employee contributions that we will convert to Roth immediately after funding using an in-plan Roth rollover. I know you can "gross-up" earned income by the amount of their elective deferrals when calculating what their 415 compensation is and also when calculating the deduction limit. However, do the after-tax employee contributions reduce earned income for these purposes? I would think you would treat them the same as elective deferrals and these contributions would come out of earned income, not reduce it. My software is reducing earned income by the amounts of after-tax employee contributions and it is making my deduction limit lower and forcing my profit sharing contribution to be less. Any help with this would be appreciated. I have researched the ERISA Outline book and couldn't find anything. Thanks,

Thank you for the response Always Complicated and Luke Bailey, I overlooked the Section 318 rules for attribution to an organization.

I have a client who wants to open a Solo 401(k) for his S corporation; He is a real estate agent and the S corporation is the entity that gets the agents portion of the real estate commission. However, he owns 33% interest in the brokerage firm that he sells out of (the brokerage firm is a partnership) and he owns this interest individually. The brokerage firm pays his S corporation the real estate sales commission when a property is sold. The brokerage firm has 3 employees. It is very common in real estate for real estate agents to be independent contractors and have their own entities separate from the brokerage firm that they represent. In this case though he has an ownership in both his real estate entity that he uses for houses he sells and he has ownership in the brokerage firm. I have determined that there isn't an A-organization relationship because the S corporation doesn't have an ownership interest in the brokerage firm and vice versa. I also don't think there is a management group because the S Corporation doesn't get paid to provide management services to the brokerage firm or vice versa. I originally thought that this would have been a B organization with the S corporation being the B-org and the brokerage firm being the FSO until I read the following from the ERISA Outline Book: 1.a. Significant portion test. The B-Organization must derive a significant portion of its business from the performance of services for the FSO, or for the A-Organization(s) related to that FSO, or any combination of such organizations. Notice that the indirect service test under the A-Organization definition (i.e., regular association in providing service for third persons) is not applicable here. The services performed by the B-Organization must be for the FSO and/or A-Organization(s). The underlined portion above makes me think that in order to be a B-organization the B-Org has to provide services exclusively to the FSO and not to third persons (like people who go to a real estate agent to help them buy/sell a property). I think the argument could be made that both the S corporation and the brokerage firm are providing services to third parties and are not providing services exclusively for/to each other. Based on the wording in the ERISA Outline Book this wouldn't be an affiliated service group and the owner would be okay to open a 401(k) plan that just covers the S corporation; he wouldn't have to consider the 3 employees that work for the brokerage firm in coverage testing. Does anyone else have any other thoughts? Would love to see anyone else's opinion on this.

The family is a Youtube family and the older daughter that opened her own S corporation does her own videos as well as participate in the videos of the family. To be honest I am not sure why the plans were setup this way, we just took them over.