404 Analysis in Affiliated Service Group Situation

[Guest EMM118]

Individual A owns 100% of S-Corp and 75% of C-Corp. Other 25% equity interest in C-Corp owned by non-employee investors. S-Corp and C-Corp both adopted the same pension and 401(k) plans. All employees of S-Corp and C-Corp participate in both plans.

Client paid himself more compensation from S-Corp. than he did from C-Corp. He is not able to deduct the entire contribution under his S-Corp. (due to basis amount limitations) Is the client able to shift more of the deduction over to the C-Corp.?

Client received $400,000 from S-Corp. and $50,000 from C-Corp. Assume proposed aggregate plan deduction is $200,000. Does it need to be pro-rated or can more of the deduction be taken by C-Corp? If compensation limit is $230,000, do you treat $180,000 coming from S-Corp. (78% of $230,000 limit) and $50,000 from C-Corp. (22% of 230,000 limit)? Is so, must $156,000 of the deduction be taken by S-Corp. (78% of $200,000) and $44,000 of the deduction be taken by C-Corp (22% of $200,000)?

Of course, we want more of the deduction to be taken by the C-Corp. Thanks in advance.

Ed

[QDROphile]

Are you treating the plans as multiple employer plans?

[Guest EMM118]

Are you treating the plans as multiple employer plans?

No we are not. 2008 was the first plan year and we have not yet filed Form 5500s. Thanks. Ed

[rcline46]

Under facts given, this is not a controlled group. Not enough information to determine if it is an affiliated service group. Since this is a document issue also, filing the 5500 is not relevant. This had to be determined at the time the document was set up. Once we know the CG/ASG situation, the rest flows.

[Guest EMM118]

Under facts given, this is not a controlled group. Not enough information to determine if it is an affiliated service group. Since this is a document issue also, filing the 5500 is not relevant. This had to be determined at the time the document was set up. Once we know the CG/ASG situation, the rest flows.

This is definately an affiliated service group under Code Section 414(m)(5) as management services are being provided. All employees in the ASG are participating under the plans. This is not a plan document issue. My question involves plan deductions. I believe that if an ASG exists, then each member of the ASG must compute its own 404 deduction limit (not the desired result). The result is clearly different if a controlled group were to exist. I would appreciate any responses that are on point. Thanks in advance. Ed

[K2retire]

I recall shifting deductions in ASG situations, but my facts were a bit different.

We had physician or dental groups comprised of 2 or more professional corporations (one for each doctor) and a partnership made up of the PCs. Doctors and their wives were the only employees of the PCs. All staff was paid by the partnership. Often the PC could not deduct the full amount of the doctors' contributions. We simply shifted the necessary amount to the partnership return and adjusted their capital accounts accordingly.

Not sure if there is anything in that fact pattern that will help, but figured it was worth mentioning.

[Mike Preston]

DB plan?

[K2retire]

OP says 401(k). Mine were sometimes DC, sometimes DB and most often one of each.

[Mike Preston]

Forget the question about DB. The OP already said that there are both pension and 401(k) plans involved.

If the contribution is to the "pension" plan (whether DB or MP), then there is an argument I've heard that goes roughly like this: a contribution is required under the terms of the plan and if not made by one member of the controlled/affiliated group, then it is ALLOWABLE (although not required) that same be made by another member.

I wouldn't do this without ERISA counsel in pocket as to an opinion on it.