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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Collapsing an ASG

(Posted August 23, 2002)

Question 226: S-corp A is a Professional Corp (PC) owned by one professional and S-corp B is a PC owned by one professional. Corp A and Corp B are partners in partnership AB. Current 401(k) plan is at the partnership level. Corp A's payroll is at Corp A level. Can Corp A move payroll to partnership and participate in 401(k) plan? Partnership AB employs 4 NHCEs.

Answer: What you've described sounds like a classic A-Org style affiliated service group. All the elements are there. That being the case, why do you want to have Corp A move its payroll to the partnership? All three entities are a single employer for retirement plan purposes. Corp A can simply adopt the plan and it will still be a single employer plan. All testing is done once, at the level of the group as a whole, regardless of which entities choose to sponsor the plan.

Of course, there may be reasons to collapse things into a single entity. For example, each member of an affiliated service group computes its deductible limit separately. In 2002, that's not likely to be an issue for a plain vanilla 401(k) plan, but it may very well be important in a cross tested plan.

If you decide to "move payroll" over to the partnership, then why would you leave Corp A in existence? If the doctor (for example) is working for the partnership, it is the partnership that should be paid for the doctor's services, and that would mean that no revenue would come to the corporation. Rather than just moving payroll, I would collapse the corporations into the partnership altogether, if you choose to go that route. As I said, however, you probably don't need to do anything of the kind.

For more on affiliated service groups and their consequences, see Chapter 13 of my book, Who's the Employer.

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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.