1099 income only

[Santo Gold]

A small business wants to start a Profit sharing plan for 2005. The company began in May, 2005. The only employees are the two 50% owners and the spouse of 1 of the owners, so we have only HCEs for 2005. I'm told however that (for whatever reason) all 3 individuals received no W-2 income at all for the year. Instead, they are being 1099d for all compensation paid to them for 2005. They will go to W-2 starting in 2006.

It's likely that more information is needed, but based on the above, do you think we can set something up for them for 2005? Does 1099 income prevent them from having any plan wages in 2005? Thanks for you advice.

[rcline46]

SHoot their accountant. But before that, demand a detailed explanation of how 1099 income fits into the definitions available for compensation in the plan document and how the hours of service definition is to be satisfied. How is an EMPLOYEE paid on a 1099?

On the other hand, you are only taking information, and they have to answer to the IRS and DOL.

[himt4]

Ignoring for the moment the issue of whether the three employees should have been paid 1099....

when someone gets 1099 income, than that is really income for their own sole-proprietor business.

So the trick will be if you can make a case that all those sole-proprietor businesses are in the same control group/ ASG as the business that you want to set up the Profit Sharing Plan for. I think.

[Santo Gold]

rcline46: I like your first recommendation. A little digging via EOB mentions a court case involving a similar situation - Van Roekel Farms vs. Commissioner. In this case, 1099 payments were made to a president of a corporation, who was the sole participant in the company's ESOP. Since the payments to the president were not reported as compensation from the corp (no W-2), the company could not treat those payments as compensation for 415 purposes. Thus there were $0 415 comp and no contributions could be made. This sounds similar to my situation.

If the above holds for my situation, could the 3 HCEs, all of whom have 1099 income only, have 1 life plans for themselves in 2005?

[JAY21]

What if you had each sole prop co-adopt the same plan (to keep costs down). That may mean it's a multiple employer plan for the first year but that mostly just entails filing multiple Schedule T's w/the 5500 I believe. Then if they're a corporation for the next year they can change the adoption (or add) to the corporation. That's one thought you might consider.

[rcline46]

Biggest problem with the sole prop idea is that the contributions must come out of their own pockets, not the business pocket!!!

Close you eyes, hold your nose, clearly put in writing you are NOT opining on the situation and you suggested legal counsel.

[Santo Gold]

Great replies, thanks to all. I am suggesting to them that they cannot proceed unless they each adopt individual plans for themselves. Next year (2006) they can look into the corp's plan. Thanks again.

[Lame Duck]

You might want to consider the fact that the spouses are probably a controlled group and should have one plan for the two of them, rather than separate plans. You may also want to investigate the possibility of an ASG that could maintain a single plan for all members of the group.

[himt4]

Lame Duck and I seem to have the same idea (posts #3 & #8), might be something worth looking into.