Participating Employer Contribution

[Dougsbpc]

Suppose you have a 401(k) plan sponsored by Employer A. Employer B is 100% owned by the 100% shareholder of Employer A so we have a controlled group. Employer B is more profitable than Employer A.

Employer A has 20 employees. Employer B only has 3 employees including the 100% owner.

Employer B adopts Employer A's plan as a participating employer.

The participating employer agreement indicates that "any contributions made by a Participating Employer will be allocated to all Participants employed by the Employer and Participating Employers".

Question:

Does this mean that Employer B can fund any portion of the match and profit sharing contribution (perhaps even all) for all participants of the plan? Certainly they would not want to exceed their 404 deduction limit but this could be quite advantageous.

[BG5150]

Basically, the way I read that is: If company B want to make a 50,000 PS, the the 50,000 gets allocated across participants from both companies.

The match, I'm not so sure about.

[Dougsbpc]

Could the $50K be deducted on Company B's return even though company A contributed $0?

[K2retire]

Would it exceed 25% of Company B's eligible payroll?

[Dougsbpc]

No. It would be less than 25%.

[PensionPro]

Could the $50K be deducted on Company B's return even though company A contributed $0?

My understanding is that Employer B can not deduct contributions it makes on behalf of employees of Employer A because it would not be considered ordinary and necessary business expenses, but check with the CPA.

"Section 404 provides that if amounts contributed to a qualified plan providing deferred compensation for employees are ordinary and necessary within the meaning of section 162 or section 212 of the Code, the employer may deduct those amounts under section 404 within certain limits. Section 1.404(a)-1(b) of the regulations and Rev. Rul. 67-341, 1967-2 C.B. 156, provide that contributions may be deducted under section 404(a) only to the extent that they are ordinary and necessary expenses and are expenses incurred for reasonable compensation for personal services actually rendered.

Cases interpreting section 162 have consistently applied the common law rules regarding employer-employee relationship in determining the deductibility of reasonable compensation. In addition, deductions are permitted only to the employer for whom the services were actually rendered. Young & Rubicam, Inc. v. U.S., 410 F. 2d 1233 (1969))."

G.C.M. 39208, December 28, 1983.

[Dougsbpc]

The ordinary and necessary expense requirement under 162 makes sense.

It is interesting that the participating employer agreement refers to "any contributions made by a Participating Employer will be allocated to all Participants employed by the Employer and Participating Employers". I have seen this very common language many times.