Cross-tested groupings of 1 EE

[J Simmons]

I understand the Service's position is that a cross-tested plan by a non-corporate employer cannot specify one self-employed person to be a cross-tested group. That would be a non-qualified CODA.

What about a categorization that given the data for a given year results in just one self-employed person qualifying for that categorization, but may in other years result in two or more self-employed persons being in that group?

[Guest Dash02]

I'm unaware of such a position ... and find it baseless. A sole shareholder has much more control on setting both his comp and plan allocation amounts than a self-employed person who is bound by his earned income amount. Consequently, the sole shareholder situation is much closer to a CODA than a self-employed person.

Its been a few years, but I received a favorable det. ltr. for a c-t plan sponsored by an LLC owned equally by a husband and wife and each participant constitutes a separate allocation group.

[Mike Preston]

Times, they are a changin'.

[Bob R]

The IRS isn't stating that having a person w/earned income in a separate group automatically creates a disguised CODA. Rather, they want a warning in plans that it "may" create a disguised CODA. That will certainly have a chilling effect on doing this. And, even with an owner in a C Corp, they haven't said you're safe (i.e., you can have a disguised CODA there as well). Ultimately it's based on the facts and circumstances. And, in both cases you probably have the effect of a CODA - the owner of the C Corp controls his/her comp while the person w/earned income affects that earned income by contributing to a plan. But, if they attempted to apply this to plans, then every small employer plan would be a disguised CODA.

It's been discussed at numerous conferences but has never had been applied (that I'm aware of) in an audit. I suppose that in many cases that's been good for us - what the IRS states at conferences generally comes from those in higher positions and many times doesn't trickle down to those in the IRS who must implement/apply the rules.

This may be the start of that communication to those in the field. It will now be a statement in volume submitter and prototypes thus there is a higher liklihood that auditors may actually be alerted to this "potential issue." So, what Mike stated (or sung) may very well be true. We'll have to wait and see how this turns out - and that will be several years down the road.

[Mike Preston]

The question is: Do you feel lucky?

[Belgarath]

Don't know about the rest of you, but when we submitted our documents, the reviewer required language substantially similar to the following:

In the case of self-employed individuals (i.e. sole proprietorships or partnerships), consider the requirements of IRS reg. § 1.401(k)-1(a)(6) so that the allocation method does not result in a cash or deferred election being created for any self-employed individual.

[AndyH]

I'm glad to see that Clint Dylan has joined the boards in the dog days of Summer.

Shall we hear from the Governator as well?

[Mike Preston]

Let's see, how does that go? Oh, yeah: "I'll be Beethoven". Or something like that.