Pension Plan for Sole Prop and Corporation

[richard]

An individual (Mr. X) has two businesses.

Business #1 is set up as a sole proprietorship, with a 1040 Schedule C. No other employees other than himself.

Business #2 is set up as a corporation (Corporation M), with Mr. X as the sole employee.

He is setting up a 25% Money Purchase Plan. How can he set up the plan so that income from both the sole prop as well as his W2 salary from Corporation X is included for determining his contribution.

(Of course, the $160,000 pay limit applies to both businesses combined.)

If the plan covers both businesses, what EIN is used for the 5500 filing? If the total earnings exceeds $160,000, which business takes which deduction?

Ideas? Thanks..

[Lorraine Dorsa]

I would set up the plan this way:

Plan will be sponsored by one of the entities and the other will be a participating employer. Therefore, use the EIN of the sponsoring employer for 5500 purposes, etc.

Since Mr. X works for 2 employers, he is treated for contribution calculation purposes as 2 participants--one under the sole proprietorship and the other under the corporation--and his contribution is calculated separately for each employer. Each employer deposits the computed contribution and the sum of the two amounts is allocated to Mr. X. (Just be sure that the sum of the compensation amounts used to compute his contribution does not exceed $160,000 and his allocation does not exceed the 415 limit.)

[Guest Paul McDonald]

Adopt a single plan that defines the Employer as all members of businesses under common control. Both entities sign-on to the plan. The compensation definition of the plan handles inclusion of both Schedule C and W-2 earnings for the purpose of calculating the contribution.

The plan should apply for its own EIN to keep the plan as a separate tax entity.

If the total of earned income from the sole prop. and compensation from the corp. exceeds $120,000 you would be at the $30,000 maximum allowable contribution total with the 25% formula. The math involved effectively makes it a prorata allocation of the deduction between the two entities.