Hopskotch during the year

[Mike Preston]

Doctor is W-2 employee and partial owner (somewhere between 10% and 15% ownership) for the first few months of 2019.  Quits, sells his stock, and starts a sole prop that is still in existence at the end of the year which appears to be throwing off around $300,000 for 2019 but won't be generating much in the future.  Accountant thinks it is a perfect fit for a defined benefit plan!  Let's assume that one course of action is to adopt a defined benefit plan that generates a deduction of $200,000 for 2019 and a minimum required contribution for 2020 through 2023 of zero [easily accomplished if sole prop throws off minimal income.

Come November 15th or so, Doctor is presented with an opportunity to purchase 100% of the stock of a medical practice where he can hang his hat.  Very little income from this entity for Doctor for the balance of 2019. Fly in the ointment? Stock is of a long-standing (more than 10 years) practice which employs 15 employees, each of which have been with the practice for a long time.

Two scenarios present themselves: a) DB plan signed sealed and delivered before November 15th resulting in reliance on 410(b)(6)(C) for the balance of 2019 and 2020 and generating a permanance busting termination on 12/31/2020 due to changed business circumstances. b) DB plan thought about long and hard but not documented until 12/15/2019 [long after stock purchase] meaning no reliance on 410(b)(6)(C) and qualified status of DB plan dependent on satisfying non-discrimination aggregating the sole prop and the 100% owned medical practice.

Too restrictive?

Does it get any less restrictive if a SEP-IRA with a contribution of $55,000 is substituted for the DB plan in (b), above?  Or does it get more restrictive because the SEP-IRA will no doubt involve a 5305 which requires aggregation?

Thanks 

[Mike Preston]

Bump.

[Mike Preston]

On 11/14/2019 at 10:40 AM, Mike Preston said:

Bump.

Bump squared. 

[Mike Preston]

On 11/15/2019 at 11:23 AM, Mike Preston said:

Bump squared. 

Bump cubed.

[shERPA]

What do you mean by "too restrictive"?  I agree with  your 410(b)(6)(C) analysis.  IIRC SIMPLE IRAs get 410(b)(6)(C), but I don't know that SEPs do.  

Does it have to be a stock purchase?

[Mike Preston]

Yes, the stock purchase has now taken place. A less restrictive view would be to consider the two organizations as not existing at the same time during 2019 so no aggregation for 401(a)(4) or 415. 

[shERPA]

Ok, didn't see that one coming.  Sole prop still exists, no?   Seems a stretch to say it went away.

[Mike Preston]

To us, yeah. But the income producing efforts have definitely stopped.

[Mike Preston]

Poor guy.  His accountant thought he could generate a deduction north of $200,000 for 2019.  He calls me and not only do I put the kabosh on anything north of $200,000 but I also tell him that it is unlikely he will be able to make any contribution to any new plan because the 401(k) sponsored by the entity he bought will require aggregation for non-discrimination purposes.

So goes the war.

[shERPA]

Some of the client meetings I've been in, they're all running out to buy ginormous (6,000# GVW) Land Rovers by 12/31.  So there's that.

[Mike Preston]

Good for truck dealers!