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Safe Harbor testing for 23’ and in June I did something stupid (maybe?)


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I’ve had a Safe Harbor plan for a few years under my small business going smoothly. Small group plan, with 6 participants, and me as owner of the S-Corp. 
 

In April of 2023, I purchased an existing Laundry business (different industry than the S Corp business) and from day 1 have been using a PEO for the 3 employees of the laundry biz. The PEO offers benefits including retirement savings options that I’m not too familiar with. 
 

Since my wife and I own the laundry business LLC 50/50, and are not employees with the PEO (just owners), is the controlled group definition going to be a mess? I am sole owner of the S Corp business with the established Safe Harbor plan. 

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Control group issue is simple - the stock ownership attribution rules consider both you and your wife to each own 100% of the laundry, and 100% of your original S-corp, so yes, these businesses are a control group.

I'm not an expert on the PEO situation, but here is my understanding: those leased employees are considered your laundry business employees unless they have a 10% money purchase pension from the PEO (I have never seen one). However, any employer contributions they receive from the PEO in a PEO-sponsored plan can be considered provided by you because you ultimately pay for those indirectly. I thought this model changed over the years, though, and PEO's could only sponsor a multiple employer plan and the individual employers had their own participating employer "plan" that covered their leased employees. I'm sure there are more knowledgeable practitioners on this forum who deal with these arrangements and can confirm or correct my understanding or lack thereof.

Finally, provided some conditions are met, there are transition rules that allow you to treat each entity as before, not in a control group, for the remainder of the transaction year (2023) and the entire following year (2024) - so you have time to sort this out and hopefully have a competent TPA to assist you.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Also in play are going to be whether or not the plan document is a standardized type that automatically extends plan coverage to all related group members.  Depending on full census demographics, the laundry business might be okay not having to adopt the plan, but that would take far more detailed analysis.

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17 hours ago, Bri said:

Also in play are going to be whether or not the plan document is a standardized type that automatically extends plan coverage to all related group members.  Depending on full census demographics, the laundry business might be okay not having to adopt the plan, but that would take far more detailed analysis.

Do those "standardized" prototype documents even exist in the wild anymore? I haven't seen one in years.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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23 hours ago, CuseFan said:

Control group issue is simple - the stock ownership attribution rules consider both you and your wife to each own 100% of the laundry, and 100% of your original S-corp, so yes, these businesses are a control group.

I'm not an expert on the PEO situation, but here is my understanding: those leased employees are considered your laundry business employees unless they have a 10% money purchase pension from the PEO (I have never seen one). However, any employer contributions they receive from the PEO in a PEO-sponsored plan can be considered provided by you because you ultimately pay for those indirectly. I thought this model changed over the years, though, and PEO's could only sponsor a multiple employer plan and the individual employers had their own participating employer "plan" that covered their leased employees. I'm sure there are more knowledgeable practitioners on this forum who deal with these arrangements and can confirm or correct my understanding or lack thereof.

Finally, provided some conditions are met, there are transition rules that allow you to treat each entity as before, not in a control group, for the remainder of the transaction year (2023) and the entire following year (2024) - so you have time to sort this out and hopefully have a competent TPA to assist you.

The PEO situation should not be confused with the rules which require those who have met the definition of Leased Employee to be counted as employees of the plan. Within the definition of Leased Employee is the exception for the leasing agency which provides a 10% money purchase benefit. A PEO should not be viewed through the Leased Employee rule lens. That will take you down the wrong path.

A PEO is considered to be the employer for payroll purposes (paying wages and filing Form W-2) and it may sponsor a MEP which its clients adopt as participating employers. However, the PEO's client (here, the laundry) is considered to be the employer, too. This is a unique concept of co-employment that is widely misunderstood. 

The laundry is the employer that provides the workplace, the direction and control of the employees. It also is the sponsor of a retirement plan for those employees -- as a participating employer in the PEO MEP.  The portion of the MEP that covers the laundry is a plan in the controlled group with the original S-corp.

Just take it from there and apply all the controlled group retirement plan rules to the S-corp plan and the laundry's portion of the PEO MEP.

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You might want to check with PEO and see if you can opt out of their MEP and have the laundry employees participate in your plan.  I administer a plan that has an adopting employer, that uses the PEO for payroll and other purposes, but opted out of the MEP and participates in the plan we administer.  

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