Publisher - Graphic Designer... Control Group?

[K-t-F]

There is a small publisher ... 2 employees.. both owners...  50/50... Setup a Solo 401(k)

• Employee A invested $100K in startup costs
• Employee B investing sweat equity

Employee B is the graphic designer and owns a separate graphic design business. This business does have rank and file employees.    No plan

Employee B does not earn any compensation from the publisher company.  Employee A does and makes a salary deferral contribution from his publishing compensation. 

Both employees receive a K-1 from the publishing company... no SE income declared on these K-1s

• Is this a control group?
• Does the graphic design company need to be included and allow their EEs to participate? 

Thanks

[ESOP Guy]

What type of company is B's graphic design business?  Corp?  LLC? Sole proprietor? 

If I remember these rules correct (and I am doing this from memory) it matters. 

[K-t-F]

I pretty sure an LLC.... Im verifying

[K-t-F]

So the fact that Employee/Owner A owns 0% of Employee/Owner B's graphic company means that this is not control group.  

Because Employee/Owner A has a 0% interest in the graphic design company means we do not include him in the Control Group test.  That leaves  Employee/Owner B and his ownership percentage of both companies to determine if a control group exists.  AND.. the fact that he is only a 50% owner of the publishing company means that there is NOT a control group because it is less than 80%

So I figured that out myself... BUT.. I wonder.. is this an Affiliated Service Group (ASG)?  The graphic design company does work for the publishing company.  It does not solely rely on the publishing company but it does do some work and considers the publishing company it's client. 

ASG thoughts?

[Lou S.]

I agree it is not a CG unless A& B are married or other attribution rules in play.

As for ASG - I hate these determinations so won't comment other than to say you should consider the possibility.

Lastly, does A get a W-2 from Publisher? If not your comment about "no self employment income" would lead me to believe that A does not have any wages on which to make a 401(k) deferral.

 

 

[K-t-F]

A & B are not married.  No attribution there.

A does pay income taxes on his pay from the publishing company. 

Affiliated Service Groups. ... confusing.    Can anyone help me put the players in place?

• Publishing Co owned 50/50 (FSO?)
• Graphic Design Co owned 100% by B (A-Org because B owns a share of the FSO)

Does the fact that the Graphic Design Co performs work for the publishing company automatically make this an ASG?  The Graphic Design Co has many clients and does not by any means earn a majority of it's income from the publishing company.  I have read that if the percentage of income is 5% or less then an ASG does not exist. 

Thoughts?

[Mike Preston]

On 11/1/2017 at 5:30 AM, K-t-F said:

A does pay income taxes on his pay from the publishing company. 

Ignoring the ASG question as that requires more time than I have available.  But the quoted sentence is not nearly enough to establish A's compensation for plan purposes is anything other than zero.  Details, please.

[K-t-F]

A is a W-2 employee... sorry for the slow response. 

[Mike Preston]

Confirm that the LLC is taxed as a corporation.  If that can't be confirmed then the status as to CG or ASG means very little.