Successor employer adopts plan

[Flyboyjohn]

Employer operates as an unincorprated LLC for 10 months of 2012, incorporates as S corp for final 2 months and adopts plan in December retroactively effective as of 1/1/2012.

We assume it's correct to prorate the 2012 employer contribution between the 2 entities based on employee compensation from each.

Our main question is how we reflect the 2 entities in the plan document, is it as simple as just defining "employer" as both the LLC and S corp?

[Bill Presson]

Did the entity keep the same EIN?

[12AX7]

It sounds like it's the same employer, with a change in the filing entity status and maybe a change in EIN that Bill asked about? I don't think the plan needed to be adopted retroactive to January 1 if the "successor entity" did not exist at that time. I would have used the December date if this assumption is correct. May not make that much difference in the end.

With regard to the "proration" of the contribution, what type of contributions are you referring to (DB or DC)? Also, what type of document are you using? Some pre-approved plans make it easy to identify a successor plan sponsor, but we're not sure yet if this is what you have.

[Bird]

I would name (would have named?) the remaining entity, the S corp, as the plan sponsor, and the LLC as an adopting employer. Or I guess the LLC could be the sponsor and then do an amendment to change the sponsor as of 11/1. (Actually I like that better.) Seems like a Q that should have been resolved at the time of adoption...?

[Flyboyjohn]

Employer/Plan sponsor was defined as both the LLC and S corp but LLC did not sign on as an additional participating employer. Both entities made maximum DC contributions based on compensation during the portion of the year they were the employer. New EIN obtained for S corp.

Do these additional facts change anybody's comments?

Thanks

[12AX7]

It doesn't change my comments. To me it doesn't seem like you have an additional participating employer and why would the LLC need to sign as an additional participating employer if they were the plan sponsor before the company became an S Corp? That part of it seems fine to me. I would not have done it this way, but the end result is that the S Corp is the plan sponsor starting from 12/12.

You also need to be mindful of 404 and 415 limits based on compensation for the entire plan year. I'm sure you're aware that the limits are not reset when the company became an S Corp.

[Bill Presson]

It doesn't change my comments. To me it doesn't seem like you have an additional participating employer and why would the LLC need to sign as an additional participating employer if they were the plan sponsor before the company became an S Corp? That part of it seems fine to me. I would not have done it this way, but the end result is that the S Corp is the plan sponsor starting from 12/12.

You also need to be mindful of 404 and 415 limits based on compensation for the entire plan year. I'm sure you're aware that the limits are not reset when the company became an S Corp.

How was the LLC the plan sponsor before the S Corp was created? The plan wasn't adopted by the LLC ever. If the EIN isn't the same then it's not the same company. It would be a controlled group if the owners are the same, but if it doesn't exist when the S Corp adopts the plan, I'm not sure any compensation paid by the LLC would count.

[12AX7]

I think I was confused by the OP and took it to mean that the plan was already in existence when the S Corp adopted it in December. You are correct Bill under the assumption that the plan was not implemented before 12/1. Still sounds like there's a controlled group.

[BG5150]

How can there be a control group if the two entities never existed at the same time?

[12AX7]

Have to go back and look at the regs, but isn't there something about a controlled group issue if both employers existed within the same plan year? This seems more like a successor employer, if anything.

[masteff]

http://www.irs.gov/Individuals/Self-Employed/LLC-Filing-as-a-Corporation-or-Partnership

Merely saying they elected to be taxed an S-corp doesn't mean they had a change in legal entity. When they became an S-corp, did they file a completely new business with the secretary of state (or other agency in your state that handles business registration)? Or did the LLC simply file a form 2553 electing to be treated as an S-corp? What do their forms 2553 and 8832 say?

Getting an EIN is almost certainly a result of the S-corp election (a change in form of taxable entity); it is not conclusive proof of a change in legal entity.