Question 149: A husband is the sole proprietor of a medical practice. His wife is the sole proprietor of another medical practice. They share employees and facilities and commingle profits and expenses. They have been operating as an affiliated service group and covering all employees under the husband's profit sharing plan. Husband and wife also own 50% each of a separate farming operation with 2 employees, which is unincorporated. Must they cover the employees of the farming operation under the husband's profit sharing plan? Is a SLOB an alternative?
Answer: Let's first find out what we have. We know we have two sole proprietorships. The sole proprietors commingle income (I'm not sure what that means, but it sounds fascinating) and share employees, expenses, and facilities. It sounds like they actually have a partnership of which they are each equal partners. If so, then the two proprietorships (if there really are two separate proprietorships) are in an affiliated service group with the partnership.
Alternatively, they could be in an ASG because one business regularly performs services for the other or is regularly associated with the other in performing services for third parties.
If there is no partnership, if they are really separate proprietorships that just have shared expenses, then at the least you have shared employees, who are handled in accordance with the rules for such employees. See Q&A 56.
However, depending on whether there are minor children, or they live in a community property state, or other factors, the two proprietorships may be under common control. I've posted a chart drawn from my book which outlines the process in deciding whether the proprietorships are under common control.
So, we now have four possibilities:
1. The businesses are under common control
2. The businesses are in an ASG because there is a deemed partnership
3. The businesses are in an ASG because they satisfy the rules without the existence of a partnership
4. The businesses are separate but they have shared employees.
Wow! That's a lot of possibilities. I don't know nearly enough from your question to speculate about which might be the case. This is one that should be examined carefully by someone who knows what the rules are and won't just say "We'll call them an ASG to be on the safe side." There's nothing safe in being wrong.
Now you add the farm into the picture. Husband is deemed to own 100% of the farm. Wife is also deemed to own 100% of the farm. So we know absolutely that the farm is under common control with each sole proprietorship. In my view, that is enough to bring all the various businesses under common control if they weren't otherwise.
Must they cover the employees of the farming operation? No. They must test the plan by taking those employees into account, but it is certainly possible that the plan will pass 410(b) even once those employees are considered. Also, it would be advisable to review the plan document to make sure they those employees aren't automatically in the plan by operation of its language.
You ask about application of the Separate Line of Business rules in 414(r). A Qualified SLOB (I've known several of those in my day) must have at least 50 employees. The farm clearly doesn't qualify. Moreover, Code Section 414(r)(8) prohibits an ASG from using the SLOB rules.
It is my habit to mention at the end of these articles where you can find the relevant material in my book, Who's the Employer. Frankly, your question draws on material from chapter 1 (entities), chapters 6, 7, and 10 (controlled groups), 12 (common control), and 13 (affiliated service groups). Congratulations! You've hit the jackpot!