Just an EASY control group question

[K-t-F]

I hate the control group issue.   I don't agree that a guy, who has 2 totally separate businesses in every way, must include both companies in coverage and testing.  That said I just need confirmation that there is nothing I am missing.

Guy is a financial advisor... independent RIA

He also has a real estate business

100% owner of both

Control group... yes?

Thanks

[ETA Consulting LLC]

Yes.

Good Luck!

[K-t-F]

I knew the answer ...  am I alone thinking this is unfair? I mean his 2 businesses have absolutely nothing in common except ownership.

[jpod]

Fairness, I suppose, is in the eye of the beholder, but to the extent one would view it as unfair it was made worse by the TRA 86 because since then we have a SLOB exception that is available only to larger organizations. 

[ETA Consulting LLC]

3 hours ago, jpod said:

Fairness, I suppose, is in the eye of the beholder

Correct.  If I have two companies; one with 10 employees that brings me in about $300K and another one with just me that brings in about $100K.  Without the controlled group rules, I can create a solo(k) plan and defer $24,500 plus make a company contribution of another $25,000. That's $49,500 without having a fund a dime to my employees.  I could, then, get cute and put another $11,500 in after-tax contributions to reach my 415 limit.  Once in, I can roll this out directly into a Roth IRA.

The controlled group rules say, 'no way!'  First, the deferrals, Employer Contribution, and After-tax would be subject to 410(b).  You'd, then, have to contend with ADP & ACP for the deferrals and After-tax.

The entire premise of allowing tax-deductible contributions and income tax deferral on the earnings is because of the value in providing a retirement benefit to employees.  The controlled group rules are merely a measure to prevent business owners from 'stacking the deck' in their favor by creating another organization and enjoying these tax benefits without providing anything for employees.  

I'm not emotionally invested in right or wrong, but continue to work diligently to ensure my business owners get the full tax leverage available to them under the rules as written. 

Good Luck!

[ESOP Guy]

Regarding the fair/unfair concept the problem is laws and regulations like objective rules. 

So you as a rule can't have things like two businesses that aren't "related" as the main test.  (note even the QSLOB rules have more than that)

In your example does the real estate business ever help people invest in real estate?  If so, is it related to his RIA business? 

I think you find it would be hard to find a good definition of Controlled Group that keeps separate the business you like and not allow the types of abuses these rules were designed to stop from happening some of the time. 

[MoJo]

3 hours ago, K-t-F said:

I knew the answer ...  am I alone thinking this is unfair? I mean his 2 businesses have absolutely nothing in common except ownership.

Fair?  I dunno.  I once heard of a guy who had two totally separate businesses.  One was a medical practice, the other an x-ray facility (or pharmacy, or physical therapy facility, or a funeral home). 

Define "separate?  As a financial advisor, does he ever recommend someone buy (or sell) a home or invest in rental property?

It's all about potential....

[JackS]

If he is not eligible for either plan, you do not have to aggregate and he can provide (almost) whatever he wants to whichever employees he chooses.

[Larry Starr]

4 hours ago, K-t-F said:

I knew the answer ...  am I alone thinking this is unfair? I mean his 2 businesses have absolutely nothing in common except ownership.

I would prefer it was not that way, but I don't think we can say It's unfair, because you have to think of what would happen without such a rule. That's where it would be unfair (IMHO). 

In the old days (before the rigorous controlled group rules), we could take a company and split it into two companies.  Put the rank in file employees in one company, and the HCES in the other and just set up a plan for the HCEs.  The controlled group rules prevent that.  If you own both companies, they are ALL your employees and they must ALL be taken into account for the non-discrimination rules.  If you are willing to leave out the HCEs from the plan, then you have every right to set up a plan just for one of the companies and you will never have a problem with that.  It is the provision of tax favored benefits to the HCEs that requires you look at ALL your employees (defined under the controlled group/entities under common control rules).

 

[BG5150]

I know several people who have truly separate businesses.

One guy is a dentist who also has a side business selling refurbished "gently-used" golf balls.

Another is a tennis pro who also owns a limosine-for-hire company.

[Larry Starr]

14 hours ago, BG5150 said:

I know several people who have truly separate businesses.

One guy is a dentist who also has a side business selling refurbished "gently-used" golf balls.

Another is a tennis pro who also owns a limosine-for-hire company.

Indeed; I have a dentist and his wife (100% attribution) who own a now successful winery (100% attribution).  The few full time winery employees are in the plan for the dental group.

There are lots of good examples of individuals who have multiple businesses. But that has nothing to do with the rules congress has written for treating multiple businesses owned by the same people as one business for non-discrimination purposes, and those are the rules that clients hire us to help them make sure they are in compliance.

[imchipbrown]

It's also "fair" to have no plans, take the income, pay the taxes and do whatever you want outside the qualified plan "world".  Sometimes the tax-deferrals aren't worth "poking the bear" of the DOL and IRS rules.

[K-t-F]

I can see how some businesses may cross, regardless of how different they may be.  And I will advise this guy that he for sure is a control group of companies. 

[Larry Starr]

On 6/3/2018 at 9:31 AM, imchipbrown said:

It's also "fair" to have no plans, take the income, pay the taxes and do whatever you want outside the qualified plan "world".  Sometimes the tax-deferrals aren't worth "poking the bear" of the DOL and IRS rules.

I certainly agree with you that there are times when "no plan" is the recommendation, and I do so quite often.  But it is NEVER because of a concern with "poking the bear" of the DOL or the IRS. We design plans that meet client objectives and meet governmental requirements; we are very good at that.  If the client objectives are better met by "no plan" and that is what we recommend, then we have done our job appropriately.  But we know intimately (;-)) the IRS/DOL rules, and they don't bother us; when we design a plan it will always meet those rules or it doesn't get done.  It is just that simple (at least in our practice).