Sole proprieter owns 2 separate entities

[R. Butler]

Self-employed sponsors a retirement plan. Plan has been in existance for years. I found out today that the self-employed has another separate sole proprietership. The plan document is non-standard; the self-employed doesn't benefit and there aren't any other hce's so coverage testing not an issue.

The issue is whether we the seperate business can be exlcuded just not having adopted the plan? Generally that is the case, but can a self-employed really have 2 separate sole-proprieterships?

Thanks in advance for any guidance.

[Kevin C]

A self-employed person can have more than one trade or business.

401(d) CONTRIBUTION LIMIT ON OWNER-EMPLOYEES. --A trust forming part of a pension or profit-sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the plan provides that contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established.

1.401-10(b)(2) If a self-employed individual is engaged in more than one trade or business, each such trade or business shall be considered a separate employer for purposes of applying the provisions of sections 401 through 404 to such individual. Thus, if a qualified plan is established for one trade or business but not the others, the individual will be considered an employee only if he received earned income with respect to such trade or business and only the amount of such earned income derived from that trade or business shall be taken into account for purposes of the qualified plan.

[R. Butler]

Thank you for these references. Maybe I'm wrong, but I am not sure that they help in my specific instance. Sole proprieterships are generally not separate entities from the owner. My question may not be clear either.

Here is an example that hopefully makes my question clear:

RMB owns Business A (Sole propreitership). Business A sponsors a a retirement plan for NHCE's & uses a non-standard prototype.

RMB also owns Business B (Sole propreitership). The operations of Business A & Business B are not related. they are located in different states, fiel different Sch. C's, etc.

Business A plan was adopted 20 plus years ago. The plan does not specifically exlcude employees of Business B. Is there a basis for excluding employees of Business B just by virtue of business B not adopting the plan? Clearly we would be okay if corporations were involved, but sole propreiters are generally not considered separate legal entities from the owner.

Thanks again.

[K2retire]

Because the sole proprietor is the same person, I think it is going to be difficult to show that he (as plan sponsor) is not the same person as the one who has the other business.

[J Simmons]

Thank you for these references. Maybe I'm wrong, but I am not sure that they help in my specific instance. Sole proprieterships are generally not separate entities from the owner. My question may not be clear either.

Here is an example that hopefully makes my question clear:

RMB owns Business A (Sole propreitership). Business A sponsors a a retirement plan for NHCE's & uses a non-standard prototype.

RMB also owns Business B (Sole propreitership). The operations of Business A & Business B are not related. they are located in different states, fiel different Sch. C's, etc.

Business A plan was adopted 20 plus years ago. The plan does not specifically exlcude employees of Business B. Is there a basis for excluding employees of Business B just by virtue of business B not adopting the plan? Clearly we would be okay if corporations were involved, but sole propreiters are generally not considered separate legal entities from the owner.

Thanks again.

R. Butler,

Look carefully at the documents by which the plan currently exists (hopefully, EGTRRA restatement documents). Does it mention that the owner is signing the adoption agreement or plan document for Business A only? For example,

/s/_____________________

Joe Jones d/b/a Business A

If so, then I think you perhaps have an argument for excluding EEs of Business B, particularly in light of the fact that two separate Schedule C's are filed with his Form 1040.

On the other hand, if the plan is just adopted for employees of Joe Jones, then I think they are entitled to be included.

[R. Butler]

R. Butler,

Look carefully at the documents by which the plan currently exists (hopefully, EGTRRA restatement documents). Does it mention that the owner is signing the adoption agreement or plan document for Business A only? For example,

/s/_____________________

Joe Jones d/b/a Business A

If so, then I think you perhaps have an argument for excluding EEs of Business B, particularly in light of the fact that two separate Schedule C's are filed with his Form 1040.

On the other hand, if the plan is just adopted for employees of Joe Jones, then I think they are entitled to be included.

The argument you suggest is what we are hoping to make. The individual doesn't use his name in either business; they each have their own business name. The Adoption Agreement references "Business A" as the plan sponsor and the employer on the signature page is listed as "Business A". We wouldn't have the problem is these were s-corps. The fact that a sole proprietorship is not a separate entity is a personal liability issue more than a retirement plan issue. I've seen positions that were bigger stretches, but I'd feel a lot better if there was a PLR or soemthign out there that lended some support.

Thank you.

[J Simmons]

R. Butler,

Look carefully at the documents by which the plan currently exists (hopefully, EGTRRA restatement documents). Does it mention that the owner is signing the adoption agreement or plan document for Business A only? For example,

/s/_____________________

Joe Jones d/b/a Business A

If so, then I think you perhaps have an argument for excluding EEs of Business B, particularly in light of the fact that two separate Schedule C's are filed with his Form 1040.

On the other hand, if the plan is just adopted for employees of Joe Jones, then I think they are entitled to be included.

The argument you suggest is what we are hoping to make. The individual doesn't use his name in either business; they each have their own business name. The Adoption Agreement references "Business A" as the plan sponsor and the employer on the signature page is listed as "Business A". We wouldn't have the problem is these were s-corps. The fact that a sole proprietorship is not a separate entity is a personal liability issue more than a retirement plan issue. I've seen positions that were bigger stretches, but I'd feel a lot better if there was a PLR or soemthign out there that lended some support.

Thank you.

I don't have a PLR or other ruling to cite for you (sorry), but if the IRS did not recognize the distinction between two or more sole proprietorships, why wouldn't it require that all sole props being blended and reported on a single Schedule C? (I know, there is no consistency rule that applies to the IRS--just pointing out and arguing it though.)

[J Simmons]

Butler,

Do Business A and Business have different EINs and different payrolls?

If so, was the separate EIN of Business A used on the adoption agreement?

Looking for more indicia for you to point to.

[Guest Sieve]

Of course, you still have 410(b) to deal with, even if you can exclude one entity's employees from the plan (unless you have 2 QSLOBs).

[R. Butler]

No 410(b) issue. The sole-propreiter doesn't benefit. It soley for the employees & none of them make enough to be an considered an HCE.

[Kevin C]

Your details in post #3 look to me like the same situation discussed in 1.401-10(b)(2). The reg says each of his trades or businesses is treated as a separate employer for purposes of applying sections 401-404. It also tells how to determine the self employed person's plan compensation if only one of his businesses sponsors the plan. I know it's dangerous to apply logic to IRS regs, but I'll give them the benefit of the doubt and take this to mean it is possible to have a plan where this rule applies.

Whether or not Business B is covered by the plan will depend on what the document says. Our NS prototype has the following as part of the section on Eligible Employees:

Employees of Related Employers. If the Employer is a member of a Related Employer group, Employees of each member of the Related Employer group may participate under this Plan, provided the Related Employer executes a Participating Employer Adoption Page under the Adoption Agreement. If a Related Employer does not execute a Participating Employer Adoption Page, any Employees of such Related Employer are not eligible to participate in the Plan. See Section 16.06 for operating rules that apply when the Employer is a member of a Related Employer group. Also see Section 16 for rules regarding participation of Employees of Related Employers. Section 16.07 contains special rules that apply if the Employer adopts the Standardized Profit Sharing/401(k) Plan Adoption Agreement.

If you document has similar language and Business B did not adopt the plan, then they are not eligible employees and are not participants in the plan. Fortunately, in your case, 410(b) won't be an issue.