Director's Plans

[Guest JD Colville]

Regulation 31.3121(d)-1(B) provides that for purposes of determining whether an individual is an employee or a self-employed individual, "a director of a corporation in his capacity as such is not an employee of the corporation". This provision and various other rulings seem to indicate that the fees received for serving on the board of directors by an individual who is an employee, officer, and/or shareholder of the corporation will be deemed earnings from self-employment; and, in the absence of a controlled group or affiliated service group requirement, the individual can set up a SEP or a qualified plan with regard to the director's fees.

However, Prop. Reg. 1.414(o)-1 seems to indicate that anyone who is a 5% owner of the company is deemed to be a "leased owner" with regard to any compensation received from the company; and any plan established by the leased owner will be deemed a plan of the company covering only the leased owner. The Regs. seem to imply at (B)(2)(i) that the rule applies to both individuals who are employees of the company and individuals who are not.

I understand that most of the Regs. which were issued at the same time as this Reg. have been withdrawn. However, it does not seem that this Reg. has been withdrawn though the concept of a "leased employer" seems to be a stretch even for the Service. If anyone has insight as to the application of these Regs. to director's plans, I would appreciate your input. Thank you, in advance.

[Lorraine Dorsa]

I have worked on many plans established by corporate directors and have never had a question from the IRS or the client's attorney or CPA re the appropriateness of the plan.

These individuals treat their earnings as corporate directors as self-employment income, pay taxes as a sole proprietor and establish the plans as plans of their sole proprietorships.

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[Guest JD Colville]

Lorraine, Thanks for the information. In your experience, have you made any distinction between plans for outside directors and plans for directors who are also employees, officers, and/or greater than 5% owners of the company. Is there any limitation for directors who are greater than 2% owners of a Subchapter "S" corporation. Thanks, JD Colvile

[Guest JD Colville]

On April 8, a notice was posted on the Reish & Luftman Internet site, http://www.reish.com/practice_areas/empben_frameset.html, providing a Q&A from the 1997 Enrolled Actuaries meeting concerning plans for inside directors. In the response the IRS said that the 414(o) regs. were not applicable, but that the affiliated service group (ASG) rules probably would restrict an inside director from establishing a plan for his/her director fee earned income. I have looked at the ASG rules and do not see how the A and B org rules would apply. If the Service could make the argument that the management service rules of 414(m)(5) would apply, why would the application be limited to inside directors? Has any one had the fun of dealing with this issue. Any guidance would be appreciated.

[Bill Berke]

I have always believed that inside employee directors were continuing in their management capacity, thus 414(m) would preclude a separate plan. Outside directors are in a different position. They are not providing management services, they are providing directorship services which is a guiding position not a management position. Offbeat analogy; Congess versus the Executive branch.

[pjkoehler]

Take a look at PLR 7839059 where the Service concluded that (1) an inside director was engaged in a trade or business to the extent of his services as a director, (2)that his net director's fees would be "earned income" and (3) that he would be a self-employed individual treated as an employee for purposes of Section 401©, making him eligible to sponsor his or her own Keogh Plan. Since the inside director would be the 100% owner of his sole proprietorship, the corporate plan sponsor would not be in a controlled group of trades or businesses for Section 414© purposes. While this is just a PLR that predates Code Section 414(m), it's hard to see how that section even remotely applies. Section 414(m)(2)(A)and (B) don't apply because the insider director's sole proprietorship is not a "service organization." To the extent anyone knows what a "management function" organization is, in the absence of 414(m) regulations, it seems a stretch to consider a director, when performing directorial services, is performing "on a regular and continuing basis, management functions for the employer."

[This message has been edited by PJK (edited 04-20-2000).]

[Bill Berke]

As you can see from the replies, this area is unsettled. I hope I am wrong in the belief that inside directorships are an extension of their management duties. Certainly that argument can be made if the inside director is not a manager, supervisor or officer. But how many inside directors are officers? (Probably all) So, unless I have a written opinion to the contrary, I assume that inside directors have an m(5) problem.