Question 78: One dental practice is a professional corporation, owned equally by individuals A, B and C. A dental practice in another town is a partnership; individuals A, B, C and D are equal partners. They do not share patients or employees, but individuals A and B work in both offices. Are these businesses under common control? If not, must they have separate plans, and can each dentist deduct $30,000 through each employer?
Answer: Are they under common control? No. D owns 25% of the partnership but none of the professional corporation, and under the Vogel Fertilizer U.S. Supreme Court case must be excluded. Because A, B, and C own only 75% of the partnership, they do not have a controlling interest, so common control under 414(c) does not exist.
I've had several questions about this issue recently, so let me state a handy rule of thumb. Generally, whenever there is some individual who owns more than 20% of one business but does not own any part of the other business, then the two businesses cannot be a controlled group or a group of trades or businesses under common control. That rule might not work if the individual is considered to own an interest in the other business through the attribution rules, or if his or her apparently more-than-20% ownership of the first business is reduced by some exclusion under IRC 1563(c) (e.g., through a nonreciprocal right of first refusal or because the stock is owned by a qualified plan).
Are they an affiliated service group? No. They are not related in providing services to the public, and neither provides services of any kind to the other.
So, can they nonetheless cosponsor a plan? Of course they can. Each employer must be tested separately for nondiscrimination, and separate Schedule Ts would need to be filed.
If they sponsor separate plans, does each have its own 415 limit? Yes. There is nothing that would join the two plans for 415 purposes. That includes IRC 415(h), which reduces the controlled group requirements for 415 purposes down from 80% to 50%, but only for parent-subsidiary groups, not for brother-sister groups.
If they cosponsor a plan, are there two IRC 415 limits? No, that's not the way I read IRC 415(a), which applies the 415 limits on a plan-by-plan basis. IRC 415(f) treats all similar plans of an employer (or by extension through 414(b), (c), and (m), a group of related employers) as a single plan for purposes of applying the limits, but nothing disaggregates contributions from unrelated employers.
In other words, if they want separate limits, they should have separate plans and maintain their status as separate employers for plan purposes.