Nanny Included in 401(k) Plan?

[pjbaer]

I have a doctor client that has six corporate entities. Five of the entities have adopted the 401(k) plan of the main entity. The doctor also has a nanny that is paid through personal funds, not through any of the corporate entities. Does the nanny need to be included in the 401(k) plan?

[My 2 cents]

Not that I would necessarily know, but I would not think that the nanny, who provides personal services to the doctor's family and is not a corporation and is not intended to be a profitable enterprise, would be considered to be a member of the doctor's controlled group. Accordingly, I would not think that the nanny has to be taken into account for non-discrimination or coverage compliance. Would it even be permissible for the doctor to offer a 401(k) plan to the nanny?

What about the 6th corporate entity (the one that has not adopted the 401(k) plan)? Would that be a problem?

But I do hope that the doctor is properly paying for worker's comp and unemployment and OASDI taxes on the wages paid to the nanny!

[John Feldt ERPA CPC QPA]

See Derrin's post on the Q&A column here at http://benefitslink.com/m/qa.cgi?db=qa_who_is_employer&n=294

Some excerpts:

Question 294: Can an individual employer make a $12,000 retirement plan contribution for a domestic employee? The employer does NOT have any trade or business. He is actually an 87 year-old retired gentleman.

Answer: Yes, he can make a $12,000 contribution. He can contribute more if he wants. But the issue is somewhat more complex.

You don’t have to have a trade or business to be an employer.

As an employer, can he sponsor a plan covering the domestic employee? Yes. There is nothing that limits plan sponsorship to trades or businesses. Any employer can sponsor a qualified plan.

Can the gentleman deduct his contributions? No. They are personal expenses, just as the domestic’s salary is a personal, nondeductible expense.

So, is there a problem with the gentleman sponsoring a plan? Yes. Not only does he face making the contribution without receiving a deduction, he is also subject to a 10% nondeductible contribution penalty under Code §4972.

The problem is that the nondeductible contribution penalty is forever. You’ve heard of the gift that keeps on giving. This would be the gift that you keep paying for, for the rest of your life. You have to repay the penalty ever year until you can deduct the contribution, which the gentleman will never be able to do.

Is there an alternative which allows him to avoid the 10% penalty? Yes. Code §4972(c )(6) allows him to set up a SIMPLE 401(k) or a SIMPLE IRA for the employee. Contributions to the SIMPLE will not be subject to the penalty tax.