Eligibility for Owner

[Pammie57]

We have a 401k Plan where the owner of the company has never received a payroll check or been listed as an employee in any census records. He has owned the company for over 10 years.

They always fail ADP testing. They want to know if he starts getting a payroll check in the last quarter of 2016 and does not defer, can his compensation for 2016 be counted in the HCE group to help with passing the ADP testing.

My first question is what is his real hire date? Their plan has a six month wait; no age requirement, and monthly entry. Second question, is when is he really eligible to participate in the plan? 2016 or 2017 after he meets 6 month eligibility.?

Any comments would be welcome.

[BG5150]

What type of entity is it? Corp? Sole-prop?

[Pammie57]

the entity is a LLC operating as a partnership.......

[Bill Presson]

the entity is a LLC operating as a partnership.......

So the owner had to get a K-1. As long as he had active involvement in the running of the business, then he's had earned income since the LLC started.

So the issue is really that he's been eligible for quite a long time and the tests haven't been accurate if he hasn't been included.

[jpod]

You say a partnership. What about the other owner(s)?

[jpod]

The thought occurs that they may be taking the (questionable?) position for tax purposes that there is no earned income so as to avoid self-employment tax.

[Pammie57]

I am trying to find out who the 25% owner is, and I am also trying to find out if the 75% owner is actively involved or is this is just an investment.....

If it is just passive investment - then can they give him a paycheck (as an employee)? I don't think so, but that is what somebody advised them to do to help with ADP testing (if he defers nothing)

This whole scenario is confusing to me....

[Bird]

See Bill Presson's post above. It seems likely that he already is an owner-employee and that nothing special needs to be done...except that all prior tests were wrong.

Now, if the income is in fact being treated as passive income and he does not have self-employment income, then you have a couple of questions - 1) is that legit (see jpod's post), and 2) if it is legit, then why would it suddenly, for business reasons, be legit to change that? Having said that, I find it hard to believe that an owner has absolutely no involvement and absolutely no "earned" income from this venture. Paying him something would not be a stretch. But paying a partner on a W-2 is wrong, and paying him $0 accomplishes nothing, IMO.

It sounds like there are a lot of people involved who have a hint about things, but only enough to be dangerous. I'd start by finding out exactly how he gets paid and work from there.