May Cash Cow Plan Sponsor Deduct Contributions EEs of ASG

[Guest EMM118]

Company A, a C-corporation, sponsors a DBPP. Company A has two employees, both of whom are HCEs. Employees of Sole Proprietorship (the "SP") also participate in DBPP. SP is controlled by one of the HCEs employed by Company A. Everything is fine so far.

Assume DBPP funding is $250,000. Can the entire amount be paid by Company A and be deducted by Company A? I'm guessing the answer is yes because Company A and SP are part of the same controlled group. It just looks bad, on tax returns, that Company A is taking deductions for employees who don't get a W-2 from Company A.

Your thoughts? Thanks in advance. Ed

[SoCalActuary]

You did not tell us if owner of SP is also an owner of Corp A. Nor the percentage of ownership.

Can you explain why it is a controlled group? Or, does Corp A receive any compensation, economic benefit, or use of the employees of SP? Maybe you have a management org for affiliated service groups?

If you are describing a controlled group, (which has not been shown yet), then the controlled group can get the deduction from any of its members. You also should consider whether you are using reasonable accounting methods, applied consistently, in treating the cost allocation between the entities.

[Guest jgordon]

This is actually answered by Section 162 of the Internal Revenue Code. A taxpayer cannot claim as an ordinary and necessary expenses the payment of compensation and/or benefits for services not performed for the company.

Short answer . . . No, Company A cannot take a deduction for a contribution made on behalf of a participant who is not an employee (it fails the requirements of section 162). The correct way to handle is to SP make the contribution to the Plan and have it deducted by SP.

[namealreadyinuse]

I think 404 allows it if an affiliated group exists because there is one employer for deduction purposes.

[Guest EMM118]

Thanks for the replies. This is a controlled group as husband and wife own 100% of the corporation and the SP is the husband's engineering business. The concern I had was that all in income is in the corporation not the SP. Is this going to raise concerns on the corporate return since the corporate return will show a significant pension deduction with a smaller deduction for salaries? Thanks again. Ed

[SoCalActuary]

Anything can cause an audit, but you have good facts and regulations behind the premise that the corp is responsible for the funding and can take the whole deduction. Talk with your actuary if you need more support.

To jgordon - the employees of the SP are also in the corp, so 162 is not a problem.