Question 129: An attorney sole proprietor has 2 non-highly compensated employees at his law practice. He also has a full-time housekeeper. The housekeeper only performs housekeeping duties at his private residence. Does the housekeeper have to be covered by a qualified plan sponsored by the attorney(intended to cover only the law firm employees)? Note: I have spoken to ERISA attorneys and practioners and have gotten 2 responses: 1) Yes, coverage is required, controlled group issues are the rule, 2) No, the housekeeper is not part of a trade or business. If the attorney was organized as a corporation, would that make a difference?
Answer: Understanding the Internal Revenue Code is a matter of understanding words. Words have meanings. We ignore, or slide over, the words of the Code at our peril. That is why I will be very specific in my choice of words in analyzing this.
The controlled group rules are not in issue. Why? Because the controlled group rules of IRC 414(b) only apply to two or more corporations or entities taxed as corporations. If any entity under consideration is unincorporated, the controlled group rules do not apply. I suppose if the attorney incorporated both his household and his law practice in two separate corporations, that the controlled group rules would apply (although there would be huge deductibility and dividend issues associated with the household corporation). But, so long as either is unincorporated, the controlled group rules do not apply.
What applies instead is IRC 414(c), the common control rules. The key phrase in 414(c) is "all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer." Notice the words "trades or businesses." If an employer is not a "trade or business," then inherenetly it is exempt from 414(c).
In other words, the controlled group issues are totally inapplicable. The common control rules are also inapplicable because the housekeeper is not employed by a trade or business.
Now, let me return to an issue I recently addressed in Q&A 126 of this column. Suppose that the housekeeper was under common control with the employees of the law firm. Would that mean that "the housekeeper ha[s] to be covered"? No. It would only mean that the housekeeper must be counted in determining if the coverage requirements of the Code are met. How difficult do you suppose it would be, based on the facts given, to design a plan which would satisfy the average benefit percentage test of 410(b)(2), even if the housekeeper would be excluded? In fact, it would be a slam dunk.
The common control rules are discussed in more detail in Chapter 12 of my book, Who's the Employer?.