Wages for Sole Proprietor

[Blinky the 3-eyed Fish]

A sole proprietor sponsors a DB plan. All of his employees, including himself, are paid through a leasing organization, thus the sole proprietor is receiving a W-2 wage. His net earned income for the business will most likely result in a negative amount for 2003.

So, how is his compensation determined for 2003?

BTW, I am only concerned with the answer for benefit accrual purposes. There is no contribution being made to the plan.

[AndyH]

What does the plan say?

Just a couple of comments. These people would not be leased employees since they don't meet the 20% requirement. Does that make them employees? I guess so. And it seems that their comp might be includable for 415 but not necessarily under the terms of the plan. Sounds like a mess calling for an 11(g) amendment.

So it sounds like you may have a 410(b), 401(a)(26) and maybe 401(a)(4) and/or 414(s) problem.

Can you include the W-2 amount from the "Leasing" company. It seems to me that it would depend upon the plan language. If you can include it for the owner, you can probably include it for the employees, and then your problems may be alleviated.

[Blinky the 3-eyed Fish]

The plan sponsors the employees that are paid by the leasing organization. In no way are they being excluded, so this is not a plan issue.

Rather, my focus is on the owner only and the determination of his compensation. I am thinking it is one of three ways:

1) Count his W-2, limit his NEI to 0 and total the two.

2) Count his W-2, do not limit his NEI to 0 and total the two.

3) Do not consider his W-2, but rather just count his NEI.

I want the answer to be 1).

[AndyH]

I don't understand your first sentence, but even if I did I think the answer depends on who is the plan sponsor and how "employees" are defined and how compensation is defined.

I think you can use 1, but only if the plan says so.

[Blinky the 3-eyed Fish]

I will recommunicate. The company, Fred's Tire World and Spa, sponsors the plan and covers the employees that work for it through the leasing organization.

I can make the document say whatever I want through an amendment, so while I do agree this is important, it is not the issue I am concerned with.

I suppose my concern is that typically a sole proprietor's compensation is his split NEI. Removing the leasing organization for a minute, it is my understanding he couldn't pay himself a W-2 wage and count that as compensation. But, because he is being paid through a leasing organization, this is okay? My concern is that it is not a substantive difference, but could be construed as a sham arrangement to generate compensation when there is none.