Is this an ASG?

[goldtpa]

A principal for a vocational not-for-profit school had a 401(k) which has been terminated and now the school wants to start a 403(b). The principal gets paid by the school and the principal also set up a management corp to manage some of the schools activities, for which the school pays his company. I think the management corp does sales, advertising, etc. He wants to set up a 401(k) in the management co. I think his management company is a B-Org, thus they would be an ASG.

[Lame Duck]

414(m)(2)(B)(ii) requires that "10 percent or more of the interests in such organization (first org or A org) is held by persons who are highly compensated employees (within the meaning of 414(q)) of the first organization or any organization described in subparagraph (A)." If your principal does not have the requisite ownership interest, he doesn't meet the requirmenets of an ASG.

Secondly, are the services he provides services normally provided by an employee of a first org or an A org? I'm not sure that "sales, advertising, etc." are traditionally provided by employees of a vocational school.

Thirdly, and probably most important, what benefit does he expect to derive from a 401(k) plan? The deferral limits under the 403(b) and the 401(k) must be aggregated on an individual basis. Your client would only be able to defer a maximum of $12,000 ($14,000 if 50 or older) between the two plans. I don't see any benefit to him from setting up a plan under which he will, in all probability, be unable to utilize the deferral opportunities.

[Kirk Maldonado]

Lame Duck:

How do you reconcile your answer with the provisions of Section 414(m)(5)?

[Lame Duck]

Based on what goldtpa stated as the functions of the "management company" I do not see it as providing mangement functions to the school. The mangement functions of the school are provided by the principal as an employee of the school, not as an employee of his own business, which provides sales and advertising for the school. If his business was providing the day to day management functions of a school principal. I would agree with you that 414(m)(5) applies. If you see sales and advertising as a normal management function for a school, then 414(m)(5) would apply.

However, I still believe the most pertinent question is still, What benefit will he receive from setting up his own 401(k) if he is particpating ni the scholl's 403(b)?

[goldtpa]

Thanks for the help. I think that he wants to be able to have a 401(k)profit sharing plan. I did not discuss that with him. As soon as I heard management company, I wanted to check the ASG rules. No sense in talking about a plan, if you can't implement.

Thanks again.

[mbozek]

What is the reason for the ASG analysis? If the principal owns more than 50% of the stock in the management co. then the contributions in the 403(b) annuity must be aggregated with the contributions to the 401(k) plan. IRC 415(k)(4),reg. 1.415-8(d). So the principal will have 1 40,000 limit under IRC 415© and a max salary deferral of 12/14k, or 17k if eligible under IRC 402(g)(8).

[Lame Duck]

Even though he has 1 $40,000 limit, it is possible that deferrals and employer contributions under the 403(b) will not reach that level. If that is the case, he would be able to establish some plan that would allow him to make a contribution up to the single $40,000 limit if he is not part of an ASG, even if he is precluded from salary deferrals.

[mbozek]

If thats the case why set up a 401(k) plan for the mgt co since the employee can make the same salary reduction contributions to the 403(b) plan? All he needs is a PS plan with discretionary contributions or a SEP.