ER's Under Common Control / Inclusion and Exclusion of Owner Comp

[Guest Robin S. Vatalaro]

Facts:

Two companies participate in a single 401k plan. One is a corporation ("INC") and one is an LLC. Mr. A and Mr. B (unrelated people) own more than 90% of both INC and LLC. INC and LLC both have NHCE employees. The LLC is taxed as a partnership.

Question #1:

Based on my research, the compensation used for ADP testing (and other) purposes should generally be the gross INC W-2 compensation + the net earnings from self employment figure from form K-1 for the LLC owners. For any non-LLC owners, I'd simply add together W-2's, in a situation where an employee is paid by both INC and LLC. Am I correct?

Question #2:

Add another wrinkle - the LLC owners wish to have their net earnings from SE excluded from considered compensation. Assume that LLC owners are all HCE's. Assuming the plan document is properly drafted, can we specifically exclude net earnings from self employment, for LLC owners, from the plan's definition of compensation? The LLC owners, who also take W-2's from INC, are trying to eliminate the hassle of waiting for their K-1's in order to determine testing compensation. The HCE's derive "psychologically" all of their compensation from the INC. Were the other entity not an LLC, the HCE's would not have any compensation at all from the LLC (eg they would not take a W-2 out of the other entitity, were the LLC also and INC).

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Thanks for any thoughts.