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Question 219: John owns 10% of F Corp and 25% of B Corp. F Corp is a service organization. B Corp derives most of its income from providing employee services to F Corp. John is not an employee of F Corp. He provides services to F Corp as an independent contractor and receives a 1099. Can he be considered an HCE of F Corp for purposes of the B-Org rules under IRC section 414(m)(2)(B)(ii)? IRC 414(q) states that an "employee ... who is a 5% owner" is an HCE. Under the 414(q) regulations, an "employee" must provide services to the employer. |
Answer: You've oversimplified the 414(q) temporary regulations. They say that an employee of a given employer is someone who is a common law employee of that employer, a self-employed individual treated as an employee of that employer under IRC 401(c)(1), or a leased employee of that employer under IRC 414(n). The employer includes not only the company sponsoring the plan, but also companies that are aggregated under IRC 414(b),(c), or (m). In other words, anyone that can be treated as an employee of the employer for retirement plan purposes can be an HCE if they satisfy the ownership or compensation tests. Conversely, anyone that cannot be treated as an employee of the employer for retirement plan purposes can be an HCE. |
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.
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