Question 56: If Dentist Able and Dentist Baker are each sole proprietors, operating in the same office and sharing the staff employees 50/50, can each have his or her own retirement plan, taking into account just his or her share of the staff employees' payroll and hours worked? Please assume there is no entity combining the two sole proprietorships.
Answer: This is a fairly classic shared employee situation. I discuss this at length in Chapter 5 of my book, Who's the Employer?, but here's a quick summary.
The staff members in a shared employee situation, according to some old revenue rulings, work for both dentists. Each dentist must credit each employee with his or her full hours of service. In other words, the receptionist is working 2,000 hours/year for Dentist Able and 2,000 hours/year for Dentist Baker. This position is supported by general common law principles and by reality.
Each dentist credits each employee with the dentist's pro rata share of the employee's compensation. So, each dentist is deemed to have paid the employee half of the employee's salary.
Suppose I'm a billing clerk working there. I work 1,800 hours a year and make $24,000. Able has a 15% profit sharing plan and Baker has a 10% money purchase pension plan. At 1,800 hours, I meet the eligibility requirements for both plans easily. A will put away $1,800 for me, and B will contribute $1,200.