EE is 50% business and 50% domestic - plan coverage?

[Tom]

We have a client who is sole owner of a Sub-S LLC.  She has no employees at this point and has K and DB plans.  She informed us she is going to hire a personal assistant who will work for the business but also do domestic work in home - likely split about 50/50 and will work over 1000 hours between business and domestic.  The problem is the client has relatively low income but makes singificant K/DB contributions.  She does not want to cover the employee.  The employee is only 4 years younger which is not helpful for the DB plan.  Fortunately the employee will not be eligible until 1/1/2021 but we have been asked to advise the client as to coverage.   Is a sole-owner business required to be aggregated with that owner's domestic employee?  Likely the IRS would say yes.

Any comments?

[Larry Starr]

2 hours ago, Tom said:

We have a client who is sole owner of a Sub-S LLC.  She has no employees at this point and has K and DB plans.  She informed us she is going to hire a personal assistant who will work for the business but also do domestic work in home - likely split about 50/50 and will work over 1000 hours between business and domestic.  The problem is the client has relatively low income but makes singificant K/DB contributions.  She does not want to cover the employee.  The employee is only 4 years younger which is not helpful for the DB plan.  Fortunately the employee will not be eligible until 1/1/2021 but we have been asked to advise the client as to coverage.   Is a sole-owner business required to be aggregated with that owner's domestic employee?  Likely the IRS would say yes.

Any comments?

Yes, buy Derrin Watson's book Who's The Employer. It is a MUST own (along with EOB and Natalie Choate's book Life and Death Planning for Retirement Benefits.  Here is your answer from Derrin's book:

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The key element is that common control groups are limited to trades or businesses. An individual may employ a maid, a gardener, a nanny, or others to help with personal tasks, but that is not a trade or business. 

Example 12.2.1 Zoe is a lawyer and owns an incorporated law practice. She also employs a nanny to take care of her children while she practices law. The law corporation pays the employees of her law firm, while she pays the nanny personally, and is careful to withhold the appropriate taxes. Her law firm and her household are not a common control group, even though she owns both. The household is not a trade or business. The corporation’s plan should not cover the nanny. The nanny does not count as an employee of the corporation to determine whether the plan satisfies the Code’s minimum participation requirements. The result would be the same if Zoe’s practice were an unincorporated sole proprietorship.

This conclusion is enhanced by the EGTRRA Committee Reports. EGTRRA added Code §4972(c)(6)(B) to the Code to exempt SIMPLE IRA or SIMPLE 401(k) contributions for domestic and household workers from the excise tax on nondeductible contributions. The House Committee wrote:

As under present law, a plan covering domestic workers is not qualified unless the coverage rules are satisfied by aggregating all employees of family members taken into account under the attribution rules in section 414(c), but disregarding employees employed by a controlled group of corporations or a trade or business.

The final clause indicates that a household employer can establish a SIMPLE IRA covering all household workers of either a husband or a wife, but excluding workers in corporations or other businesses they own.

 

[jpod]

To simplify, I think, the question here is whether she work enough hours for the Sub S to become eligible by virtue of THAT employment alone.  It sounds like the answer is "no," so problem solved.