Employer/Employee/Affiliated Service Group?

[imchipbrown]

Dad sells corporation (a service business) to son and daughter in year one and retires. Corporation sponsors a 401k with son, daughter and a NHCE. In Year 2, Dad receives 1099 income as a consultant to corporation. Dad wants to set up a Solo 401k as a sole proprietor.

I'm setting aside the question of whether Dad is an independent contractor or employee. I'm thinking that there's an Affiliated Service Group; Dad still owns the stock of the Corp through attribution.

If so, aren't there coverage and non-discrimination issues, since Dad will want to defer most 1099 income.

[ETA Consulting LLC]

It is, likely, not an ASG. Remember, one of the requirements for a ASG is a shared HCE (an HCE working for both companies). It could, however, be a management group (which is the same effect), if the consulting services provided are actually management services.

Details are very important in making such determinations.

Good Luck!

Edit: The rule is actually that an HCE must have a certain level of ownership in the second company (not merely being an employee).

[imchipbrown]

That's the answer I want, but I can't find any reference to the shared HCE requirement.

[ETA Consulting LLC]

It's in 414(m).

It's not merely employed, but an HCE must own a portion of the other company; making my last statement a little off.

Good Luck!

[imchipbrown]

Dad "owns" the sole proprietorship and 100% (son's 50% and daughter's 50%, by Sec. 318) of the corporation. Right?

Is the contention that receiving 1099 income means you're not employed by the corporation?

I looked at 414(m) and didn't see any employment requirement.

[ETA Consulting LLC]

Correct. The ASG rules require a "joint ownership" as well. Instead of saying an HCE is employed with both, you're saying that an HCE owns a certain percentage of the company.

It is what it is.

Good Luck!