CG / ASG?

[Cloudy]

50% owner sells ownership in C-Corp, will be paid $500,000 per year for next 5 years as payment. Continues to work for C-Corp and draws a salary. Can this person open up an S-Corp to receive the $500,000 per year and have the S-Corp start a qualified plan just covering himself?

[Larry Starr]

38 minutes ago, Cloudy said:

50% owner sells ownership in C-Corp, will be paid $500,000 per year for next 5 years as payment. Continues to work for C-Corp and draws a salary. Can this person open up an S-Corp to receive the $500,000 per year and have the S-Corp start a qualified plan just covering himself?

I wish you were more specific with your facts, so let me assume....

He sold 100% of his ownership to non-family members so he is no longer an owner of any percentage of the business, directly or by attribution.

He is going to continue as an employee of the company he sold (no problem there). 

How is the $500k paid to him?  It appears it will NOT be salary (W-2) because you note he will still "draw a salary" which appears to be in addition to the $500k a year. Correct?

So, with all that, the $500k a year is a payment for his stock; that is a capital gain item and not earned income.  He can open an S corporation but the payments are not earned income so they are not available to use to justify a retirement plan.  It is conceivable (but subject to scrutiny) that his "salary" might be able to be paid to him as an independent contractor (if that is realistic and depending on what services he is going to provide to his old company) and his fees paid to his S Corp and not as a W-2 employee and then he could  be able to set up a plan and use the money in the S corp to provide W-2 income and retirement contribution to a plan.

All in all, your idea as presented almost definitely won't work, but of course, we really don't have all the details.

The client should be getting advice from a competent tax advisor (lawyer or acct) who understand these issues and can advise him on his options.  You should refer the client to such an individual and not try to answer this on your own.

[shERPA]

This question, in slightly different flavors, comes up over and over again.  Someone is getting a bunch of money, they don't want pay taxes on it.  Can they put it in a plan?

The nature of the income and how it will be reported must be understood first.  When I get the question I ask how the payments will be reported, both by the payee and the recipient.  If they don't know, I tell them they need to sit with their tax advisors and figure that out, then we can talk about whether or not a plan is feasible.  

[Cloudy]

How the payments are reported is the education I was looking for. Thanks for both replies. I would never give advice on this kind of situation, other than to advise they consult with a qualified attorney or CPA.