Owner of S-corp

[Cynchbeast]

We have client that is an S-corp with 2 owners and a profit sharing plan requiring 2 years service for participation. Although she was never formally terminated, in past years Owner #1 has not worked or had any hours been drawing any W-2 income for several years (about 10), while Owner #2 has. Now the roles are reversed and effective with the (fiscal) plan year starting 02/01/13 Owner #1 is collecting W-2 income while Owner #2 is not. Owner #1 wants to participate in the Profit Sharing, but we initially thought a 5 year + break in service would exclude her for 2 years, and so were prepared to establish a second Profit Sharing plan with special first year eligibility.

The Client's accountant has done some research and believes that an owner of an S-corp is always considered a statutory employee of the corporation.

1) Is the accountant correct, and should we have been treating Owner #1 as a non-benefitting HCE all these years?

2) If the answer to 1) above is yes, do we always treat an S-corp owner as having worked over 1,000 hours, even if census data shows less? (she has had a couple years of under 500)

3) If Owner #1 has had many years without any income, and a couple with minimal income and under 500 hours, does she have a break in service or not?

4) It seems that if we consider her to have no break in service, she can participate in the existing plan (no second plan is needed), but if she does have a 5 year + break in service, then we need the new plan in order to allow special first year eligibility - is that correct?

Any insight we can get into this subject is greatly appreciated.

[BG5150]

What does the 5+ years break have to do with this?

[Bird]

I didn't read the fact pattern that carefully, but we were watching ASPPA webcasts here in December, to catch up on CEs, and there was a remark in one that said, in effect "the BIS rules don't mean what you think - if someone was in a plan, and they return to work, they're probably back in the plan right away - especially if they had an account balance."

[BG5150]

From what I remember, the only time the 5 yr BIS comes into play for excluding service is if the plan has the Rule of Parity:

Parity BIS rule: if EE (1) is plan participant; (2) is 0%
vested; (3) incurs 5 consecutive BIS, plan
permanently may disregard EE’s prior service

So, unless this person was 0% vested, the rule probably doesn't apply.

[Cynchbeast]

Thank you - it seems that Owner #1 should be in the plan upon return, and there is no need for a second profit sharing plan.

Next question - as a 50% owner of an S-Corporation, is she considered a statutory employee to be included in each year's testing (as either benefitting or non-benefitting), even if she has years in which she earned $0 W-2 income?