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|Question 310: My wife and I own and operate a hardware store as an S corporation and maintain a SIMPLE plan for our 12 employees. The corporation is a member of a buying cooperative of which I am a member of the board of directors. I receive fees in my name for my service as a director, and I report them as a sole proprietorship on my individual Federal income tax returns. Am I a SLOB?|
Answer: Sir, there's no SLOB like a Qualified SLOB, and you're not one of those.
Let's take this piece by piece. You are deemed to own 100% of the S corporation (because you are deemed to own your wife's stock) and 100% of your sole proprietorship business (your service as a director). That means the two businesses are under common control. It doesn't matter that your hardware store is affiliated with the buying co-op. The common ownership is sufficient.
As a result, you cannot set up a qualified retirement plan for your director fees (i.e., making a contribution only with respect to those fees, without making a contribution for the hardware store's employees) for at least two reasons: (1) the plan would fail the minimum coverage test because you would need to count the store's employees; and (2) the SIMPLE arrangement would fall apart because a SIMPLE must be your only retirement plan.
But I'm sure you already knew that, which is why you're asking about the separate line of business (SLOB) rules.
The SLOB rules can take one business and effectively split it up. To benefit from those rules, one must have a "qualified separate line of business" ("QSLOB"). How does one have a QSLOB? There must be a line of business as described in Treas. Reg. 1.414(r)-2 that is a "separate" line of business as described in Treas. Reg. 1.414(r)-3 and that meets the qualification requirements set forth in Treas. Reg. 1.414(r)-4 and -5.
Those rules are complex and involve a lot of fact-specific issues, but one of those rules is simple and, alas, fatal in your situation: a line of business can't be a QSLOB unless the line of business has at least 50 employees. Neither of your businesses satisfies that requirement. So neither of your businesses can be a QSLOB.
But let's suppose for the sake of analysis that the hardware store had at least 50 employees and otherwise satisfied the requirements to be a QSLOB. Would that solve your problem? No. Although a QSLOB is tested separately for the minimum coverage and minimum participation requirements, QSLOB status for one of the businesses does nothing to address the problem with your existing SIMPLE plan, namely that a SIMPLE must be the only retirement plan of the employer (taking the common control rules into account in determining who's the employer). The SLOB rules don't change that.
Hence even if you were a SLOB, you'd still have a problem if your desire were to adopt a qualified retirement plan solely with respect to your director's fees. So tuck in your shirt already!
Chapter 12 of the new 6th edition of my book, Who's the Employer, discusses common control. Chapter 10 looks at the consequences of related employer status and chapter 25 looks at SIMPLEs and other plans outside of qualified plans.
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.