Solo 401 and Simple - Controlled Group Questions

[Guest xi9001]

Corp 1 is owned 100% by Person A (only employee)

Corp 2 is owned 50% by Person A and 50% by Person B 50%

Corp 1 establishes Solo 401K for Person A (only employee)

Corp 2 establishes Simple IRA for 3 employees (Person A and 2 others).

Since Person's A interest in Corp 2 is not greater than 50% , it does not

fall under classification of Controlled Group.

Do you guys see any problem(s) with this arrangement?

Please advise.

Thank you

[austin3515]

Unless it's an Affiliated Service Group, no. So for example, if Person A is a Doctor, and Corp B is owned 50% by Person B (the other Dr.) and the the two B employees are the nurses working for Dr.'s A and B, and Corp B pays Corp A for Person A's services then you probably have an ASG. Of course, the ASG rules for attribution are a little tricky but I would assume that under my theoretical fact pattern you would have an ASG.

And the 50% threshhold is relevant only for 415 limitation purposes. Interestingly, as long as you don't cross into the CG/ASG rules, even if you went over 50%, contributions to a simple IRA would not count towards the 415 limit. From the EOB:

Note that IRC §415(k)(1) does not include a SIMPLE-IRA plan as a defined contribution plan which is subject to §415, so contributions to a SIMPLE-IRA are not annual additions and are not limited by the defined contribution compensation limit.

That's actually a great plan-design tip for this situation in the right circumstances...

[Calavera]

Unless it is a Controlled Group by attribution if Person A and Person B are related.

[austin3515]

One would hope that would have come up in the OP...

[Guest xi9001]

Thanks for the feedback - here are more clear details...

Person A is an IT Consultant who works for his client through CORP A.

Since he is the only employee, he wants to maximize retirement contributions

via SOLO 401k. He also started CORP B with another partner (50%). CORP B

is an IT Staffing firm and has 2 employees. Person A and Person B actively

manage CORP B and are not related to each other...

Few questions:

1. Should CORP A pay a salary to PERSON A directly for management services or

should it compensate CORP B (which ultimately pays Person's A salary)? What is

the proper way of doing this to 'avoid' Affiliated Service Group classification.

2. The basic goal is to allow CORP A to max out Retirement Benefits to PERSON A via SOLO 401K and to offer some retirement plan (I am thinking SIMPLE IRA) to be offered to all employees of CORP B. Is this doable based on the facts above? any other suggestions would be appreciated.

[austin3515]

If A just happened to have a consulting gig with a client, and that service is totally unrelated to the staffing service and there's really no connection, than there wouldn't be an ASG--at least not an "A-Org".

It could also be a "B-Org" if for example the two employees are answering A's phones and preparing A's bills, etc., but that doesn't seem likely (because it seems like a simple consulting gig).

[Guest xi9001]

Thanks Austin,

Few more details:

Person A worked through B-CORP for 3 month, before forming his own A-CORP for consulting gig.

Now they operate independantly and have its own clients. Person A manages both CORPS. How should he be compensated from B-CORP (they could pay him a salary or pay A-CORP for his services) - Which way is more appropriate?

Thanks again.

[austin3515]

There's a third kind of Affilliated Service Grooup called Management Group, which you should look into as well then. I don;t think that one applies either, but just to be thorough.

Regardless, you're question is really a tax/legal question, not a retirement plan question. Is Person A the common law employee of Corporation B? If so, then he must get a w-2, and pay payroll taxes on his pay from Corp B (as does Corp B). This situation of course supports that no ASG exists. I would assume this is the most correct treatment.

That being said, there are lots of situations where these "management" corps are set up just as your describing (i.e., Pay A's comp through Corp A). Why they are able to avoid the payroll tax issue that I've described above is a legal/tax question. If anyone knows the answer, I would be intrigued.