Controlled Group/IRC 404 & 415

[JAY21]

A client personally owns 100% of two different types of entities (one medical related and one in unrelated consulting) which is clearly a brother-sister Controlled Group. IRC 414(b) states that the controlled group rules apply to IRC 415, but make no mention of IRC 404 (deductions). I take this to mean that with only one 415 limit that only one entity could sponsor a DB plan with one 415(b) limit. However, could the other entity sponsor a DC plan simultaneous with the other entity sponsoring a DB plan and fund them both to the invididual plan maximums (i.e, over 25% of pay when combined) without violating the combined DB-DC deduction limits under 404(a)(7) ? I guess the question comes down to whether Controlled Group rules treat both entities as "one" employer for deduction purposes. Any thoughts/opinions are appreciated.

[Belgarath]

Jay - my copy of the Code & Regs, Section 414(b), says the following: "With respect to a plan adopted by more than one such corporation, the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer..."

[JAY21]

Thanks Belgarath, I obviously did not continue reading the paragraph until near the end where the 404 cite appears.

[JAY21]

Belgarath, or anyone else, it appears this "Single Employer" treatment for 404(a) purposes is for Controlled Groups only and not Affiliated Service groups, agreed ?

(I do realize though that 415 does apply on a "single employer" basis for Affiliated Service groups though which could cut down on plan options).

[Belgarath]

JAY - this part, for me at least, becomes rather murky. If you look at IRC 413©(6)(A), it appears to say that if ©(4) doesn't apply - the plan was established after 1988 - then each employer appears to compute the 404(a) deduction separately.

But I do believe there may be issues about the validity of a deduction as an ordinary and necessary business expense under IRC 162 where one entity takes a deduction for expenses like this which are based upon another entity.

Absent an attorney's opinion or an explanation from someone who truly has a depth of understanding of this issue (which I do not) I'd be hesitant to attempt such a deduction. I'll be interested to see what other folks here think.