Controlled Group

[mming]

The owner of Company A has his wife on the payroll and sponsors a 401k plan. The wife owns Company B which has nothing to do with her husband's company and does not have any plan. She is paid $100K by Company A and receives $50K from company B. I believe this is a controlled group situation and the combined compensation of $150K from both companies can be used for purposes of Company A's plan. I always thought Company A can make and deduct the resulting contribution based on the $150K, but have recently spoken to someone who insists that the deduction has to be split between the two companies based what each company paid her. Which method is correct? All help is greatly appreciated.

[Blinky the 3-eyed Fish]

There are no hard and fast rules as to how related entities deduct the contribution amongst themselves. You are correct. I am betting the EOB has an explanation of this.

[Moe Howard]

Blinky is wrong.

Company A must pay & deduct the "contribution" that's based on her $100.000 compensation from A and Company B must pay & deduct the "contribution" that's based on her $50,000 compensation from B.

mming, your question is an income tax question (not an employee benefits question).

Corp A & Corp B are separate legal entities. Even if the two corps file a consolidated income tax return, on which the total consolidated contribution is deducted, each must pay their contribution separately and the Retained Earnings account for each corp must reflect each corp's contribution.

Blinky, there are hard and fast rules on this matter .... it's called the US Tax Code.

[Guest CharlieLaur]

Did Company B adopt the plan established by Company A?

If not, Company B does not have a plan to which a contribution can be made with respect to the compensation paid to the wife.

What taxable year are we talking about??

[mming]

Thanks for the responses.

Charlie, we're doing some projections for calendar 2006. The plan defines "Employer" as all entities required to be aggregated under IRC sec. 414, so wouldn't this automatically include all members of a controlled group and not require company B to formally adopt the plan? I'm a little rusty at this, but what you're describing sounds more like a participating employer in a multiple-employer plan.

[Blinky the 3-eyed Fish]

I had assumed B had adopted the plan, but now I re-read your first post and you clearly state it has no plan. I agree with Charlie that is a necessary step in order to consider that compensation paid. I stand by the fact that if both entities adopt the plan, the deduction can be taken any which way amongst A and B.

Moe in his normal abrasive self shall be ignored.

[Moe Howard]

Blinky, your lack of knowledge about the US Tax Code is obvious.

Your credibility has diminished greatly.

Your comments are fishy!

[Guest mjb]

I agrree with Blinky.

Why is this an issue if the CG files a consolidated tax return? According to CCH Master Tax Guide Para 297 under IRS rules the parent co is designated as agent for all of the corp. and operating losses of one member can be used to offset profits of another.( I dont see the basis for allocating comp among the gp members to determine the deduction for each member when all of the deductions/losses/ profits of all members are ultimately netted against each other when the parent files its return for the gp.) Otherwide each corp in the CG has to file its own return based upon income /deductions. I am assuming that B is a participating employer under the terms of the plan.

[Guest CharlieLaur]

Yes -- I still feel that Company B must adopt the plan in order to include the compensation paid by Company B, unless your plan document specifically requires the participation in the plan of all members of the controlled group and the inclusion of compensation paid by all members in the definition of plan compensation.

For example, the prototype plans which we sponsor "allow" related employers to adopt the plan but do not require that they do so.

Under our plans, two members of a controlled group could sponsor separate plans or one member could sponsor a plan and the second member could decide to not sponsor a plan. In testing the plan(s), all employees under the controlled group are considered as if they were employed by a single employer.

[Moe Howard]

mjb, I agree with you when you say that you "can't see the basis ..."

The reason that you "can't see" it is because you "don't have" knowledge of the US Tax Code.

Keep in mind that controlled groups are not required to file a consolidated tax return. They do so at their own choosing. If member's of a controlled group choose not to file a consolidated return .... then each member will file it's own sepatate tax return. The tax liability of the consolidated return as compared to the combined tax liability of the separate tax returns will be the same, because of the limitation on corporate tax brackets.

So, trying to justify your belief that expenses incurred by one corp can be deducted by another corp because allocation is not clearly stated on a consolidated tax return is nonsense.

mjb, please don't try to enter the realm of income tax law. Don't go there until you have a little knowledge under your belt.

The tax code has nothing to do with common sense. It has everything to do with knowledge.

[Ron Snyder]

Moe-

You claim to be an expert in the Internal Revenue Code and belittle others who disagree with you although they are obviously as knowledgeable and intelligent as you are. If this is the case, why not simply post a citation to the IRC (with which you profess familiarity), the Regs.?

I have read Blinky's and mjbs posts for years and know them to be very knowledgeable. The trouble with your rudeness and arrogance is that you need to back them up with verifiable facts, citations, etc., rather than self-aggrandizing posturing.

PS - I'm an ERISA attorney and an actuary with 30 years in the business and will match knowledge or wits with you anytime.

[Guest mjb]

I dont follow your logic as to the tax liability being the same regardless of whether individual returns are filed by each member of the CG or a consolidated return is filed b/c there would be no tax benefit to the CG using the net losses of one company to offset the the profits/gains of other CG members which is permitted under the IRC. (e.g. net income of co A is -100,000 due to NOL, then NOL can be used to reduce taxable income of Co B by 100,000 which reduces total taxes of CG). Every accountant I have ever worked with has stated that corp file consolidated returns to take advantage of netting operating losses of one company against against profits of the others or netting capital losses of one member against cap gains of others member of the CG to reduce the overall tax on the CG. I would be interested in a differing opinion with citations to the IRC or regs to demonstrate your knowledge of the tax law that the rest of us lack.

I also dont understand the following gibberish in your post:

"So trying to justify your belief that expenses incurred by one corp can be deducted by another corp because allocation is not clearly stated on a consolidated return is nonsense."

The only thing I agree with is that there is no requirement that members of a CG to file a conolidated tax return.

[Guest Pensions in Paradise]

Moe - you should read Sal Tripodi's ERISA Outline Book. He discusses this issue in detail.

Unless of course you think Sal Tripodi isn't worth your time.

[Moe Howard]

mming, the person who told you that the deduction has to be split between the two companies based on the salary that each company paid her .... is correct.

Let me apologize for the jump-the-gun method taken by Blinky in this message board. He tries to answer every question posted. I guess he thinks he's on a TV Game Show. Little does he realize that no answer is better than a guessed wrong answer, unless he qualifies his answer with the words "I think".

mjb is also a borderline Game Show contestant with an attitude.

vebaguru is knowledgeable most of the time but I doubt that he is a veba attorney. I would rate his level of correctness as that of a first rate TPA supervisor.

Pen is a follower, who takes things way too serious.

I won't rate my own level of knowledge, I too modest.

Glad I could help.

I really enjoy this message board. I look forward to getting along with everyone and trading thoughts & ideas about employee benefits.

[Belgarath]

Getting warm in here.

I don't have the answers, but FWIW I'll go through my thought process, such as it is. I started off leaning in the direction Blinky espouses, but I'm now leaning toward Moe's interpretation, ONLY FOR A NON-PENSION Plan. I want to emphasize that, as the original question is regarding a 401(k), and I think the results are perhaps different for a pension plan.

First, I went to 414(b), which says that for a controlled group, the limitations under 404(a)...will be allocated to each employer in accordance with regulations prescribed by the Secretary.

Great, except that I can't find any such regulations. Are there any? Assuming not, then I'm left with 404(a), which allows a deduction only if it would "otherwise be deductible." And this appears to be governed by IRC Sections 162 and 212.

See PLR 8032079, and Revenue Rulings 69-525, 70-316, 70-532.

I'm therefore inclined to say that absent special circumstances (such as termination liability - see 404(g)) for a non-pension plan it probably is only deductible as properly allocated to each employer. But I'm by no means certain that this is ironclad, and probably subject to reasonable interpretation and disagreement. Again, I think for pension plans there is a different result.

[Guest Ned Ryerson]

Moe it is apparent you are being intentionally obtuse and antagonistic. Why? Didn't that behavior diminish once you passed the age of 12? Do you continue to internalize the gradeschool beatings you must have suffered? Does Mom love your siblings more? Do Curly and Larry gang up on you? Do you like movies about gladiators or have you been in a Turkish prison?

Enough about this nonsense. Who wants insurance! Moe especially with his bros trying to kick the crap out of him at every moment. Now I understand why.

By the way, this is my favorite "Moe Moment". I think it sums up the boy quite well.

http://benefitslink.com/boards/index.php?s...mp;#entry114874

[Ron Snyder]

vebaguru is knowledgeable most of the time but I doubt that he is a veba attorney. I would rate his level of correctness as that of a first rate TPA supervisor.

You are as incorrect about me as you are in most of your posts. I am an attorney as well as an actuary, and have been in employee benefits for over 30 years, an attorney for over 20 years. (I first became an actuary and then went to law school.) I am a member of the Employee Benefits Committee of the Tax Section of the ABA (along with various subcommittees), and know many of the practitioners in this area from all over the country. I have never seen you at the meetings.

Moreover, I challenged you to come up with a cite to the Code, Regs. or IRS ruling and the silence of your response was deafening.

[Guest Pensions in Paradise]

vebaguru - you shouldn't even waste your time responding to Moe's comments. At this point he's gone back into his deep, dark hole. Hopefully for another two years!!! (Prior to this spurt of posts he hadn't posted since May 2004)

[Jim Chad]

Executed.

[Blinky the 3-eyed Fish]

Jim, I am not sure if you are saying that Moe has been executed or if you meant to post on the topic titled "Late Document Amender".

Moe has some issues, but execution is a bit harsh.

[Moe Howard]

veba, Belgarath's earlier post in my defense contains sufficient cites.

Some of you folks are just down right rude to Moe. What's the big deal ? Why all the negative attitude? Have any of you ever heard of professiona politeness?l

[Ron Snyder]

Professional politeness? Like in post #3 ("Blinky is wrong") or in post #7 ("Blinky, your lack of knowledge of the US Tax Code is obvious. Your credibility has diminished greatly. Your comments are fishy!"). How about post #10 where you respond to mjb who had agreed with you by saying "The reason you "can't see" it is because you "don't have" knowledge of the US Tax Code." You followed with, "mjb, please don't try to enter the realm of income tax law. Don't go there until you have a little knowledge under your belt." Or how about post #14, "mjb is also a borderline Game Show contestant with an attitude."

Sorry, but you reap what you sow on this board as well as anywhere else. Don't expect politeness if you don't give it. I will not let anything you assert without citing chapter and verse go unchallenged. Do it right or go away.

[Moe Howard]

veba, ok I see your point. Just because I resemble Moe Howard, doesn't mean I should act like him. I guess that looking like a famous movie star has gone to my head. Sorry!