Related Employer Issue

[bdeancpa]

I have a client who owns about 25% of his employer and participates in his employer's 401(k) Plan. In addition, he is a director of an unrelated entity and received directors fees for that work which he reports on Schedule C of his tax return. He has had a 25% pension plan for several years with respect to the directors fees.

In addition, he has many personal investments and this year he rented office space and hired an employee, just to keep track of these investments. The expense of the employee and office space are treated as investment expenses and deducted on Schedule A of his personal income tax return, subject to the 2% of AGI floor. The pension plan he maintains for his director fees has an immediate eligibility provision in it. My question, as you've probably guessed by now, does he have to make a 25% contribution to a pension account on behalf of this new employee?

If the Schedule C buisness is a separate business form the investments (which I think they would be since one generates SE income and the other does not), would the investment business have to specifically adopt the plan before she would be eligible. If so, would the investment entity have to adopt the plan to keep it qualified? If so, could they adopt in 2002 and use the otherwise excludable employee exception to keep from failing the coverage test for 2001. Thanks for any help you can give.