401(k) for an unincorporated business

[Lori H]

A client who is an HCE and member of a company that we recently assumed the responsibility for administering their 401(k) plan wants to discontinue participating in that plan and roll those funds into a plan for his unincorporated single proprietorship. This company solely consists of the HCE and his wife. The net income consists of rental income received from affiliated companies on which the HCE owns the property - approximately $50,000, as well as consulting income charged for management of the properties of approximately $60,000 which is paid by the sponsor of the plan that the HCE wants to quit participating in. I understand that an unincorporated business may use 401(k) plans as a benefit program and calculations are more involved since the HCE's income would be reduced by his wife's. However, are there any ramifications of establishing a plan for this Schedule C company due to the fact that the HCE is a member of the other company? If additional information needs to be obtained please let me know.

[Guest tbreedlove]

If you do not have controlled group or affiliated business then he could establish 401(k) for Schedule C business. If wife has income from business why would he want to stop in other plan when between them they could defer $24,000 or $28,000 depending on age. He also could contribute up to the matching level in his current plan and do the rest in the new plan. They also could contribute Profit Sharing Contribution and receive more than 25% in total between the deferrals and PS contributions.

[ccassetty]

Re the rollover question: Only if he has experienced a distributable event. If he is able to withdraw the funds from the 401(k), I don't see any reason why he couldn't roll them into his own 401(k). However, I agree with tbreedlove that he can do better if he participates in both plans.

[Guest jdw]

Earned income excludes rental income, with exceptions for share cropping and "real estate dealers." IRC 1402(a)(1). Unless he can satisfy the IRS he is a "real estate dealer (does he have a license?), the rental income is ignored.

If that is the case, he has $60,000 of earned income in the proprietorship. From that, his plan contribution is deducted, so if my math is correct the maximum he can contribute under 404 is $12,000 (20% of $60,000, or 25% of $60,000 less the contribution). Deferrals can increase this, but I wonder if he would get a larger allocation staying where he is, especially since the Affiliated Service Group B-org rules appear to describe this situation. If its an ASG, the proprietorship plan has problems.

[Lori H]

thank you very much for your responses. the prospective client is an HCE and 100% owner of two companies(w-2earnings), one of which has the aforementioned 401(k) in my first post. With this info, am I correct in assuming this constitutes a controlled group, therefore, the availability of a 401(k) to his Schedule C company would be a "no-no"? His Schedule C company is unincorporated and it's net income consists of rental income received from affiliated companies on which he owns the property-approximately $50000 and consulting income charged for management of the properties-approximately $60000 paid by his company that maintains the 401(k) that he wants to opt out of. Doesn't sound like a viable option for the gentleman. Is there any alternative to a sole proprietor 401(k)? Something Nonqualified perhaps?