Can This Crazy Design Work?

[mming]

Maybe I'm wrong but it looks like one of those "can't find anything that prohibits this" kind of things . . . . . A 100% business owner employs, among others, his sister. Since she is not an officer nor an HCE, could the business set up a new comparability-style profit sharing plan where the sister can be isolated by herself in an allocation group (via her compensation level) and get 100% of the contribution (as long as it doesn't exceed $45K)? The owner, along with everyone else, would get nothing and he's OK with that since he's worked out a cash deal with his sister outside of the plan.

[Mike Preston]

I usually find that the life-partner plan is better still.

[John Feldt ERPA CPC QPA]

It looks okay, be sure to look at:

the 415 limit and

the 404 deduction limit and

410 coverage, such as: she is not an HCE (or if she is, they employ no NHCEs that could be eligible, etc)

[Blinky the 3-eyed Fish]

Is she not going to be an HCE soon under this design? Let's say it's a 401(k) plan, so to get her to $45,000 in total, she needs $29,500 in employer contributions. Since she is the only one benefiting in the plan, she needs $118,000 in compensation so that the $29,500 is deductible by the employer. That makes her an HCE next year unless the top paid group somehow keeps her out.

Of course you could give $10 to a lot of the other NHCE's, or whatever you feel comfortable with, to treat them as benefiting so you can use their compensation and not have to pay the sister so much.

[Belgarath]

Good point! I wouldn't have thought of that initially.

Heed the wisdom of the fish! That trinocular focus confers unusual powers of perspicacity.

[AndyH]

My binocular analysis is that the business owner has some issues with his sister.