Compensation of employees of affiliated service groups after terminati

[billfgrady]

Short version: If an affiliated service group exists at the beginning of a given Plan year, does it exist for the entire Plan year? Or is it broken down the way that the control group rules do?

Long version: Employer A, an S-corporation, and Employer B, a personal service corporation, are an affiliated service group. Employer A contracts with Employer B and other personal service corporations to provide services to a third entity. Employer B is wholly owned by Employee B, who is Employer B's sole employee. Employee B also owns more than five percent of Employer A and is a participant in a 401(k) Profit Sharing Plan organized for employees of Employer A (and by definition, employees of Employer B are included notwithstanding the fact that Employer B does not actually adopt the Plan).

Employer B is terminating its contract to provide services with Employer A in March of 2003. Employee B will receive W-2 compensation well in excess of the compensation limit under Section 401(a)(17) in 2003, mostly in the form of collectibles/receivables for services rendered prior to the termination date which Employer A will continue to collect for 18 months after termination and will pay to Employer B on a monthly basis. Employer B, in turn, will continue to pay Employee B wages related to such services after the termination date.

Does Employee B need to remain a shareholder of Employer A until the end of the Plan year to receive a full profit sharing contribution from Employer A or can Employer A redeem Employee B's shares upon the termination date without worrying about running afoul of the affiliated service group rules or other prohibitions? I assume that no proration of compensation is required because this is not a short plan year.