Multiple plans - with sole proprietors

[Guest SteveHample]

Some more common questions. In general there seems an IRS philosophy against double dipping to get around contribution limits. For example I saw reference to a controlled group proposed reg that would prevent Fred from dividing his basket business into basket weaving and basket marketing and having two SEPs and maxing out on both.

So it seems likely one cannot have two of the same kind of plan.

Question One

What about George who is employed seasonally (teacher, snow plow operator in Buffalo NY) who participates in the employer's 401k or 403b plan during the winter and successfully guides canoe trips in the summer as a sole proprietor or sole owner of an LLC or Sub S ? Is there anything to prevent George from creating a SIMPLE or SEP for the conoe business and contributing the maximum under that plan for his summer work?

Question Two

Harriet the hard working realtor is an idependent contractor with a SIMPLE plan. Late in the year she lands the sale of a lifetime and decides to drop the SIMPLE as of Nov 1 and start a SEP to defer as much as possible from a year end $200,000 commission. Anything to prevent Harriet defering the SIMPLE maximum on her early in the year $50,000 of earnings PLUS the maximum SEP on the year end $200,000 earinings?

[Tom Poje]

as regards to question 2, if I understand you correctly, Harriet had a SIMPLE plan and wishes to dump it in favor of a SEP.

The law clearly states that a SOMPLE must be the exclusive plan for the year.

at the ASPA conference (2000) [question 36] what if a qualified plan is established after the SIMPLE plan is funded?

the SIMPLE is invalidated and contributions must be returned by the due date of the employees tax return.

This particular question is cited in The ERISA Outline Book as well - 2001 edition , page 12.21

I would assume this includes gains/losses, etc.

Remember, the exclusive rule for SIMPLEs includes 403(B)s, 457s and SEPs as well.

Note: as your questions deal with SEPs and SIMPLEs, you might wish to ask them in the SEP/SIMPLE board. There are a lot better experts in regards to these types of plans than I am!

[Guest SteveHample]

Thanks for the fast reply. I will repost on that bulletin board where I see there are several similar questions. Interestingly, some responses there seem a bit more permissive, such as having both a SIMPLE and a SEP provided a controlled group issue is not present. My questions are slightly different from others posted but related. Perhaps Gary over on that board may want to aggregate them into a merged thread to provide overall philosophical guidance on multiple plans.

[AndyH]

Steve, the premise to your comments is incorrect. There is no prohibition on multiple plans. There are organization-wide deduction limits. There are individual limits. There are aggregation rules regarding each limit. There are, as Tom pointed out, also some "exclusive plan" rules, mostly with regard to simple-type plans.

For example, your realtor could set up a profit sharing plan. She could instead set up 20 profit sharing plans. What matters is that the deduction and individual limits are satisfied.

The exclusive plan limits pertain only to simples and seps. Those types of plans have by design very strict limts. This board focuses more on "qualified plan" rules, which have more expansive limits. And, the plan limits you reference do not generally apply.

Hopes this provides some perspective.

[Guest reg_h2b]

Andy is spot on but let's be a little more specific. For the purpose of this example, let's only deal with PS plans where we are only concerned with employer contributions (ie no elective deferrals). There are two questions it seems to me:

1. When are multiple PS plans aggregated for the purposes of IRC 415© limits?

2. If one is employed by multiple companies but essentially performs the same service for each company can this get the employee into trouble? Does it violate the spirit of the law?

Here's my two cents:

1. 415©:

415© is applied to defined contribution (DC) plans by limiting the amount of employer and employee contributions that may be allocated to an individual's account(s) in all DC plans maintained by the employer in any one year to the lesser of a specific dollar amount or a specified percentage of the individual's compensation in that year.

The key words here- it seems to me- are "plan" and "employer". For the purposes of 415© the IRS has defined "plan" --in general--with the following:

"...all qualified DC plans (whether or not terminated) ever maintained by the employer are treated as one DC plan"

So then who's the "employer"? IRS defines the employer as:

"IRC 414(B), ©, and (m) provide that for IRC 415 purposes, all employees of all corporations which are members of a controlled group of corporations, all employees of trades or businesses (whether or not incorporated) which are under common control, and all employees of the members of an affiliated service group are treated as employed by a single employer".

Thus if an Fred is a participant in PSP 1 at Company A and PSP 2 at Company B and A&B are considered by 414 to be separate employers the 415© limits are applied separately. In other words, the dollar limitation for 2002 would be $40K for each account. Fred's total dollar 415© limit for 2002 is $80K.

2. "Spirit of the Law":

Now let's assume Fred was an investment advisor. He works as a consultant/indep. contractor to some of his individual clients but for some others who have companies he is hired as an employee to do his investment advising. He does substantially the same type of work for the companies and the individuals. He gets a separate W-2 from each company. (None of the companies have any cross ownership as defined in 414). At what point is Fred violating the "spirit" of 415© if he gets a PSP contribution from each company in addition to a contribution from his self employed, sole proprietorship?

If the companies are real companies with real revenue and have a real business (other than just for the purpose of capturing the contribution) I say this does not even violate the spirit of the law.

At what point would this example become a sham transaction or otherwise violate any IRS limitations or laws? Does anyone have any court cases or PLRs that have probed this issue? (PLR 8841044 seems to touch on some of the issues above and backs non-aggregation of the limits). At what point does this become abusive? Would 5 part-time jobs? 20 jobs? For some high-fee consultancy jobs it would be easy to see how one could manipulate employer relationships in order to capture separate employer contributions especially in this new era of 100% PS contributions.

Thoughts?

Reg Jones