Who's the Employer?

Answer: The answers to your questions are: (1) What guidelines? (2) What IRC 414(o)? and (3) Why not?

Let's start with your last question. Can an entity that is not a trade or business establish a qualified plan? Absolutely, yes. A plan sponsor must be an employer. There is no requirement that a plan sponsor be a trade or business. Congress, in fact, specifically recognized that a family with household employees is an employer eligible to set up a plan. See Q&A 214 (click).

With that background, we then ask whether an employer is a trade or business for purposes of the common control rules under IRC 414(c). Unfortunately, there are no guidelines on the subject, and the Code uses several definitions of trade or business. My own suggestion, which I discuss in Chapter 12 of my book, Who's the Employer, is that the definition of trade or business for purposes of 414(c) should be the same as the definition of trade or business used in the self-employment tax rules, which is the basis for determining whether a business owner is a self-employed individual and hence can be covered by the plan. But as far as I know, neither a court nor the IRS has formally ruled on the subject.

How does 414(o) fit in? It doesn't. IRC 414(o) allows the Treasury to write and finalize regulations to prevent avoidance. They have written some, withdrawn most, and finalized nothing. Until the regulations under 414(o) are written and finalized, the provision is meaningless.

In any event, I know of no proposal to deal with this issue under the original 414(o) proposed regulations, and I have not heard of any IRS projects to develop such regulations on "the front burner." At the moment, they have more important fish to fry than exercising a power than has lain dormant for 18 years.

I discuss IRC 414(o) in Chapter 15 of my book, Who's the Employer.

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