Real Estate Management Company & 401(k)

[Guest Michael519]

I have a client who has maintained a straight discretionary profit sharing plan for many years. He has maximized his contribution to the limits allowed.

He is a dentist (sole proprietor) and has had approximately 2 full time employees. The others are part time with extremely limited hours, and they have not participated in the profit sharing plan. In 2006, 3 new full time employees are coming into the practice.

What he would like to do is this.

Create a safe harbor 401(k) plan and make a 3%-4% NEC for himself and the other eligible employees.

Using $220,000 as the 2006 compensation (he is not age 50), he could defer $6,600(NEC) + $15,000(EC) for a total of $21,600 for himself.

His wife has a company that does real estate management. The dental practice is NOT located in any of the properties that she manages. She is the only employee of the real estate management company.

Could she have a 401(k) plan for herself and defer $15,000 as well. Or could she have a straight profit sharing plan and defer up to 25% of her income?

All of the income her company makes is from rental income on properties she and her husband (the dentist) own.

I am not sure if you can use rental proprety income as allowable compensation, and I am concerned about common ownership issues and how that would relate to the dental practices plan.

Any advice would be appreciated.

Thank you,

Michael