Adding an Employer to a 401k Plan

[CLE401kGuy]

Dr. X has a 401k plan - he's the 100% owner of his practice (he's an eye doctor) and has had his plan for a good 10 years

Dr. X's wife is also a Dr. - she has started her own practice (she's a dermatologist) - their practices are entirely separate except that the docs are each 50% owners of the derm practice.

They would like to have the derm practice adopt the eye practice's 401k plan to contain cost (plan doc, investment platform, etc) - Is this permissible? and then do I have some sort of MEP that requires me to do any special work?

Based on ownership, they are not a controlled group (not more than 50% identical ownership)

Clearly, a separate 401k plan could be set up for the derm practice since the derm and eye practice's are not a controlled group.

Thanks for your help anyone - it's always appreciated

[PensionPro]

before concluding they are not a controlled group couple of questions to consider

1. are they In a community property state?

2. do they have a minor child under the age of 21?

[CLE401kGuy]

Here are answers to those questions

1) They live in Ohio which is not a community property state (Ohio is a marital property state)

2) They have a 5 year old daughter

[PensionPro]

I believe # 2 creates a controlled group so you would end up with a single employer plan.

[CLE401kGuy]

In which case, the dermatology practice just adopts the current plan and we aggregate everyone together....

If the derm practice opened it's own plan, I'd have to aggregate the 2 plans together anyway so we'd essentially be in the same place

I appreciate the feedback

[MWeddell]

I believe # 2 creates a controlled group so you would end up with a single employer plan.

Why would having a child create a controlled group?

[BG5150]

Spouse: Individual is deemed to own stock owned by spouse unless legally divorced or separated by decree.

An exception to spousal attribution exists if all the following conditions are satisfied (Be aware that a community property interest nullifies this exception):

o No direct ownership in spouse’s business (caution: community property ownership = direct ownership).

o Not a director, not an employee and does not participate in management of spouse’s business.

o No more than 50% of gross income from spouse’s business derived from passive income.

o No distribution restrictions of spouse’s stock in favor of the spouse or minor children. (Be aware that distribution restrictions other than to a current co-owner are very rarely found and must be specifically included in the company’s charter or operating agreement for this provision to apply). Attribution to a minor child may still result in a controlled group even when the spousal exception applies.

Minor child: Parent is deemed to own the stock of a minor child (under age 21); conversely, minor child is deemed to own the stock of parent.

Adult child: Parent is deemed to own the stock of an adult child (age 21 and older) only if the parent owns (or is attributed as owning) more than 50% of the stock of the company. Conversely, an adult child is deemed to own stock of parent if adult child owns (or is attributed as owning) more than 50% of the stock of the company.

[source: CPC Related Groups and Business Transactions Module Study Material, © 2013]

[MWeddell]

Thanks. That was helpful.

Seems to me you get to the same result more directly. Dr. X owns 100% of both companies. Because he directly owns 50% of the dermadology practice, then the other 50% ownership by Dr. X's wife is attributed to him. Dr. X's direct ownership in the derm practice means that the exception from the spousal attribution rules in Code Section 1563(e)(5) is inapplicable.

[Note, I don't usually work with small businesses, so I'm not an expert on family attribution rules.]