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Answers are provided by S. Derrin Watson, JD, APM
WSJ Forgets ASG Rules
(Posted October 2, 2002)
Question 233: What do you think of the September 30 Wall Street Journal article on solo 401(k) plans?
Answer: I think it's unfortunate that the WSJ published the article without checking first on the legality of what it describes. I refer to the fifth paragraph of the article, which reads:
Now, it might well be that the author just doesn't have the facts straight. For the sake of Mrs. Kuzma I hope that's the case. In fact, it appears likely that the facts are wrong. She is described as having "her own consulting business" and yet her husband is said to be paying her "salary." Salary is what you pay an employee, not an outside consultant.
Rhonda Kuzma used to help out at her husband's dentist office for free, doing everything from setting up a Web page to interior design. This year, Ms. Kuzma is establishing her own consulting business to take advantage of the new solo 401(k) plan. Her husband will pay her a salary, allowing her to stash away about $15,000 in her new plan. "It allows me to save the largest percentage of my income," she says.
Of course, this brings up the question of whether Mrs. Kuzma is in fact an independent contractor or an employee of her husband's business. That is a question of fact but the article does nothing to enlighten us. If she is an employee, then she cannot set up her own plan.
But let's put that aside. Assume that things have been set up properly and that the facts show she really is an independent contractor. Even then, she is in trouble with her plan, because the relationship between her business and her husband's business is, at the very least, an affiliated service group (ASG) under IRC section 414(m).
Look at what we are told. The husband is a dentist, unquestionably a service organization (and, if incorporated, a professional service corporation). Mrs. Kuzma is a consultant, also a service organization according to the IRS. She regularly performs services for her husband. Moreover, thanks to the attribution rules of IRC section 318, she is deemed to own her husband's business. With all of these elements in place, the two businesses are an ASG.
As an ASG, all employees of both businesses are deemed to be employed by a single employer. If the dental practice has other employees who would satisfy her plan's eligibility requirements, there is no way that Mrs. Kuzma's plan will satisfy the minimum coverage rules of IRC section 410(b).
But I only know what I read. Because of the article's internally contradictory references to "salary" and "independent contractor," I do not fully trust the article's description of the facts. Perhaps the facts are sufficiently different that Mrs. Kuzma is not a sitting duck for an IRS audit of the plan. But if the WSJ description of her situation is close, she really ought to have a good attorney review that situation quickly. The review also should consider the effect of the common control rules of IRC section 414(c). I just hope nobody takes the article as license to do something similar.
Affiliated service groups are discussed in Chapter 13 of my book, Who's the Employer.
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