Contribution for Participants in a Terminating Member of a Controlled

[Guest Thornton]

A self employed person (SE) has three sole proprietorships (A, B and C), for which he gets three Schedule C's. Effective 1/01/03, he started a single 401(k) profit sharing plan covering A, B and C . Eligibility is immediate, but accrual rights require 1,000 hours and last day service. As required, service with one business entity counts for all entities. Only A has employees other than SE.

SE has income from A, B and C. It is now possible that SE might sell A by the end of the first quarter. Neither he nor any of the other employees will have 1,000 hours with A. However, he has hours with B and C and will exceed 1,000 hours when the three businesses are combined.

Question: When he makes the contribution for 2003, can his earnings at A (quite substantial, even for the 3 months or so) be included when calculating the contribution? The former employees will not have the required 1,000 hours. One problem I see is that some of the may have worked over 500 hours. If so, it seems that we have a coverage issue since the HCE will receive a contribution and the NHCE's won't.

Any advice would be appreciated. Thanks.

[mbozek]

T: you need to review the plan document to see how comp and service is credited. If A B and C are part of a controlled group because they are owned by the SE then comp and service of A should be counted.