dentist with a SIMPLE401 is now drawing income from a management company...

[Lori H]

a dr with an S corp practice offers his employees a simple 401(k). the doctor also has a managment company. he is a 50/50 partner with his wife and in 2003 they drew income around 60k annuallly from it. his cpa wants to know if he could set up a plan outside the simple for him and his wife. the management company has no employees and he owns 100% of his practice. i think he would be able to do it separately of the simple 401(k) since i do not think it constitutes a controlled group, but i might be wrong due to his wife having some ownership. any suggestions?

[Lame Duck]

My understanding of the attribution rules would attribute the wife's ownership to the husband so that he is, effectively, a 100% owner of both entities, making it a controlled group. You might want to review the rules under Regulation Section 1.414©-4(b)(5)

[Lori H]

thank you lame duck. i reviewed the reg and i agree. so any income attributed from the management company would have to go against the $205,000 comp limit in his dental practice's SIMPLE 401(k)? correct?

[Guest bill mahoney]

Lori,

The larger problem is that any plan he put into effect with the management firm would then have to be offered to the employees in the other firm.

Bil Mahoney

[Appleby]

It appears there is an exception under 1.414©-4(b)(5), if the spouses meet all of the following requirements, and the company is not a partnership or a sole proprietorship

1.414©-4(b)(5) Spouse--(i) General rule. Except as provided in paragraph (b)(5)(ii) of this section, an individual shall be considered to own an interest owned, directly or indirectly, by or for his or her spouse, other than a spouse who is legally separated from the individual under a decree of divorce, whether interlocutory or final, or a decree of separate maintenance.

(ii) Exception. An individual shall not be considered to own an interest in an organization owned, directly or indirectly, by or for his or her spouse on any day of a taxable year of such organization, provided that each of the following conditions are satisfied with respect to such taxable year:

(A) Such individual does not, at any time during such taxable year, own directly any interest in such organization;

(B) Such individual is not a member of the board of directors, a fiduciary, or an employee of such organization and does not participate in the management of such organization at any time during such taxable year;

© Not more than 50 percent of such organization's gross income for such taxable year was derived from royalties, rents, dividends, interest, and annuities; and

(D) Such interest in such organization is not, at any time during such taxable year, subject to conditions which substantially restrict or limit the spouse's right to dispose of such interest and which run in favor of the individual or the individual's children who have not attained the age of 21 years. The principles of Sec. 1.414©-3(d)(6)(i) shall apply in determining whether a condition is a condition described in the preceding sentence.

What do you think?

[Lori H]

hi

thanks for the replies. the Management Company IS a partnership. The Dentist practice is a S-corp. I would imagine that if he acquires employees in the Management Comp. he would have to extend the SIMPLE plan now furnished to his practice to them.