Section 415 Aggregation

[billfgrady]

Two employees are each exactly fifty percent owners of a professional service corporation, which maintains a 401(k) profit sharing plan. Each employee will receive a contribution equal to the 415© maximum for 2002, $40,000. None of this amount is attributable to a 401(k) elective deferral. Both individuals are also employed by a non-profit organization, which provides a voluntary 403(B) Retirement Plan for the benefit of its employees. Under this particular plan, employees may elect to defer all or some portion of a yearly bonus of $16,000 into the 403(B) Plan. Neither employee has an ownership interest in the not-for-profit. However, both employees are highly compensated in 2002.

Question: Is it possible for each employee to receive contributions of $40,000 under the professional service corporation's 401(k) Profit Sharing Plan and defer $12,000 (remaining $4,000 in cash) under the 403(B) Retirement Plan of the not-for-profit or does Section 415 or some other limitation prohibit this?

Treas. Reg. Section 1.415-8(d)(2) provides that if the employee owns or controls more than 50% of another business that maintains another plan, the contributions to the Section 403(B) Plan must be "aggregated" with the contributions to the outside plan or the 403(B) employer's other plans. Given that neither employee owns more than 50% of the professional corporation, I conclude that aggregation under Section 415 will not be an issue under these circumstances or otherwise. Please advise.

[mbozek]

Yes, the contributions are not aggregated because the employee is considered to be the employer of the 403(B) plan. The regs reflect this aggregation rules so the employee can have separate contributions to both plans. In fact the employee could have an additional $1000 over 50 catch up+ $3000 402(g) catch up under the 403(B) plan if eligibility requirements are met so as to defer a total of $16,000.

[IRC401]

Any chance that the private company forms an affiliated service group with the tax-exempt entity? Are there any leased employee issues ???

[billfgrady]

IRC401:

Good point. Another practitioner suggested that, even if there is no common ownership between the entities, one might have an affiliated service group if the primary owner of the for-profit entity is also a highly-compensated employee of the not-for-profit. Given that both employees in the current scenario are highly compensated employees of the not-for-profit, this is a concern of mine. Can anyone point me to any statutory or regulatory authority to validate this?

[mbozek]

403(B) annuity plans can only be established by charitable organizations that can accept tax deductible donations under IRC 501©(3). IRS regulates these entities and requires some of them to file income tax returns. Non profits are also regulated by state attorney generals and are subject to restrictions on how money is spent. NP must have a legitimate business purpose and its tax exempt status must be approved by IRS after maiking a detailed filing of its purpose and operation. NP can have its tax exeempt staust revoked if it acts in a manner that is contridictory to its exempt purpose.

[billfgrady]

I'm fail to see how the above post is relevant to my question, so I'll ask again. Is there anything in Section 414(m), the regulations thereunder or elsewhere that suggests that you have an affiliated service group if an owner (50% or less) of a professional service corporation is also a highly compensated employee of a not-for-profit? I haven't found anything.

[IRC401]

Does the professional serivces organization have any relationship to the not for profit? For example is the professional services organization run by MDs who provide services to a hospital? Is the professional services organization truly independent, or do the HCEs "own" it by virute of their positions with the not for profit? (Is the ownership arrangement a straw man situation?)

I am wondering how someone who is an HCE of a not for profit also has time to run a professional services organization. If he is supposed to be working full time for the not for profit, but isn't there are issues. If revenue that should be going to the not for profit is being diverted to the professional services organization, there are issues. If the professional services organziation is derving revenue from the not for profit, there are issues.

If the professional services organization dervies its revenues from activities unrelated to the not for profit, and the HCE is doing what he is supposed to be doing for the not for profit and has time to run a business on the side, everything should be OK, but my instincts tell me to look for tax issues.

[billfgrady]

As of the date that the HCE is employed by the not-for-profit, he performs all required duties for the not-for-profit. He does not perform any more services for the professional service corporation. Rather, the professional service corporation still has income in the form of receivables for services performed prior to the date that the HCE became employed by the not-for-profit. Therefore, none of the income of the s.c. is related to the not-for-profit.

The HCE will satisfy all requirements in terms of eligibility in the for-profit 401(k) Profit Sharing Plan. Given that the amount of the receivables for the year of "overlap" is sufficient, I calculate that the HCE may "max out" his 401(k) Profit Sharing Plan contribution for the year of overlap. Assuming there are no aggregation problems or the like, he should also be able participate in the 403(B) Plan of his new employer.