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Answers are provided by S. Derrin Watson, JD, APM
Sole Proprietorship and Affiliated Service Group
(Posted April 11, 2000)
Question 47: Individual X owns 100% of Corp A and is an employee of that corporation. Corp A owns 50% of the stock of Corp B. Corp C owns the other 50% of the stock of Corp B. Corp A, Corp B and Corp C constitute an affiliated service group.
Corp B sponsors a qualified retirement plan that covers the employees of all three corporations, including individual X.
Individual X also earns self-employment income that is unrelated to the three corporations. Can X's sole proprietorship sponsor a qualified plan for X's self-employment income?
Answer: Yes, but ...
X's sole proprietorship is a trade or business under common control under Code Section 414(c) with Corp A. So all employees of sole proprietorship X and all employees of Corp A are deemed to be employed by a single employer. And because all employees of Corp A, Corp B and Corp C are deemed to be employed by a single employer, guess what? As I read your description, you have one big employer made up of all four entities.
So sole proprietor X can sponsor a plan but has to take the other organizations into account in testing for compliance with Code Section 410's minimum participation requirements, and the various other Code rules.
Messrs. Holland and Wickersham of the IRS would read things differently. They say you would test any plan twice, once for the employees of sole proprietorship X and Corp A, and once for the employees of Corp A, Corp B and Corp C.
Either way you look at it, sole proprietor X has to take the other corporations into account in setting up his own plan.
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