Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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Question 26: Most of the questions in this column and in most books seem to be centered around trying to keep multiple companies from being aggregated, mine is the opposite.
I have 4 companies that from the outset appear to be a single employer, and prefer to be treated as a single employer for their 401(k) plan. The 4 companies are contruction companies, each doing a different contruction contracting aspect (cement, drywalling etc.).
There are 5 total owners, but based on the control group rules they do not appear to be a true control group. Since they don't appear to be an affiliated service group, I'm having trouble seeing them together.
All 5 owners basically run the 5 companies, same building, same equipment, same trucks etc. Is there a possibility to see these a single employer under the management company guidelines? I hate to have to treat them as a multiple employer when there is basically no real testing needed anyway. Any hints?
Answer: This situation is more common than you think, and indeed my book addresses one of the more commonly used strategies to create a controlled group.
Can options be used deliberately to create a controlled group?
Let me add another caveat. By creating a controlled group for qualified plan purposes, we are also creating one for ordinary income tax purposes. If two or more corporations regularly show a profit on their tax return each year, they may end up paying higher corporate income taxes because of the creation of the controlled group.
Yes, it would also be possible to set up a management group, assuming that even though the corporations are not in a controlled group, they are at least "related" (in other words, the same persons own more than 50% of each corporation). If that is true, then set up a management company, perhaps owned by all 5, which provides management services to the five businesses. If they are not "related," however, this won't work, because of the definitions in 414(m)(5).
You are correct that this isn't otherwise an affiliated service group, because contractors are generally not "service organizations."
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.