Controlled Group Relationship - Household Employees

[Vlad401k]

Hi,

 

I have a question about a Controlled Group relationship.

 

A sponsor owns two companies: A and B. For company A, she has a 401(k) Plan and there is no 401(k) Plan for company B. Company B is currently an LLC (that she also owns 100% of) where she has 1 household employee. She is thinking of dissolving the LLC to avoid the 2 companies being in a Controlled Group relationship.

 

According to the plan sponsor, the household employee (at Company B) is not part of a trade or business (and their payroll and any 401k contributions would not be tax deductible) so they believe the household employee would not need to be covered by the Company A's 401(k) Plan if the LLC is dissolved.

 

"Reading from IRC 414:

(c)Employees of partnerships, proprietorships, etc., which are under common control
(1)In general
Except as provided in paragraph (2), for purposes of sections 401, 408(k), 408(p), 410, 411, 415, and 416, under regulations prescribed by the Secretary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer."

 

Is this still a Controlled Group relationship and would the household employee from Company B need to be covered by Company A's 401(k) Plan.

[Peter Gulia]

If the key reason your client is thinking of dissolving a company is so the company and other business organizations are not treated as one § 414 employer, your client might reevaluate.

In 2001, Congress recognized that an employer’s contribution to a retirement plan for a household employee is nondeductible if the contribution is not made for a trade or business.

See Internal Revenue Code of 1986 (26 U.S.C.) § 4972(c)(6)(B) https://www.govinfo.gov/content/pkg/USCODE-2023-title26/pdf/USCODE-2023-title26-subtitleD-chap43-sec4972.pdf.

I.R.C. § 414(c) refers to “employees of trades or businesses (whether or not incorporated) which are under common control[.]”

If the LLC and its household employee do no work for a trade or business, there might be no need to treat the LLC as a part of the same employer as the businesses the owner controls.

Consider whether the LLC might establish a § 408(k) SEP or a § 408(p) SIMPLE for its household employee.

As always, get one’s lawyers’ advice.

This is not advice to anyone.