Can a trust be a plan sponsor?

[Guest LMalone]

We have a trust set up years ago for the care of a severely disabled patient. The trust is in good order and its legalities are not in question.

The trust employs people to care for the patient - round the clock nurses, an administrator of the trust (several million dollars), workers on a farm owned by the trust, and the mother is an employee who is the main drive behind the good care for her son.

QUESTION: May this trust establish a profit sharing plan for the benefit of these employees? There would, of course, be a separate retirement trust to hold plan assets.

Any thoughts?

Thanks.

[Erik Read]

Profit Sharing Plan - what is the Trust's business that it generates a profit over and above interest and capital gains?

This is going to get interesting....I've not a clue about the if, just curious about the profit...

[Lori Friedman]

"Profit sharing" has nothing to do with a sponsor's business profits. A taxable employer can have a net loss for the year yet still make a contribution to a profit sharing plan. Also, nonprofit organizations frequently sponsor profit sharing plans. Under I.R.C. Sec. 401(a)(27), profit sharing plans exist without regard to the employer's current or accumulated profits or whether the employer is tax-exempt.

I believe that the term "profit sharing" predates both Sec. 401(a) and ERISA, and that its technical meaning has evolved into something significantly different from its original use.

[Lori Friedman]

LMalone, I can't think of any reason why this trust can't sponsor a profit sharing plan. A trust is a form of legal entity and can certainly be an employer. For example, it's not unusual for a public charity or private foundation to exist as a trust, have employees, and sponsor a qualified plan for the benefit of its staff. As another example, qualified plan trusts are exempt organizations within the meaning of I.R.C. Sec. 501(a), and the larger trusts -- those with employees -- usually sponsor retirement plans for their own staff members.

You say that your client is a trust that employs people. I say "yes" on the profit sharing plan.

Kirk M., do you want to add anything to this discussion?

[E as in ERISA]

The farm employees would be a business.

I'd look up the rules on household employees in regard to the nurses, etc. It used to be harder to provide retirement benefits for household employees. But I think that they eased up the rules a few years ago. Just haven't followed it closely myself.

[E as in ERISA]

This touches on the issues I'm talking about http://benefitslink.com/modperl/qa.cgi?db=...employer&id=214

I think that might suggest that they might want separate plans for business employees (farm workers) and a SIMPLE for domestic workers.

[four01kman]

If the trust is a business entity, which in this case it certainly sound like it is, than I see no reason why it couldn't sponsor a retirement plan.

The type of retirement plan would be dependent on the objectives of the plan sponsor for the employees.

[E as in ERISA]

I'd recommend discussing with the tax preparer for the 1041 and 1099s and W-2s for the trust. Do all of these "employees" get W-2s? Or are some 1099'd? I would assume that the farm income and workers would be reported on a Schedule F (and they are W-2'd) So I can see the trust sponsoring a plan for them. I don't know, but I'm guessing that the payments for nurses would not be reported on any business schedule like a Sch C or F. I'm assuming that they are actually treated as distribution to the trust bene for tax purposes? So again I think you'd want a separate arrangement there -- and since they are probably domestic workers then you'd probably want a SIMPLE? I don't know about the administrator and the mother. Are they W-2'd or 1099'd? Sounds like those would not be a business of the trust like a Sch C or F. Probably reported on the 1041 as administrative expenses of the trust? So don't know how that would look. At the end of the day, I don't think it's a matter of whether you can set up the plan. It's a matter of how you set it up to keep it all straight. And it's a matter of whether you have a nondeductible contribution to the plan subject to excise taxes. (Which is the reason you go with a SIMPLE for domestic workers like nurses).