Who's the Employer?

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

Common Control with Sole Proprietorship and Corporation

(Posted February 26, 1999)

Question 6: Dr. is a self-employed physician, with no employees. Dr. also owns 80% of a medical lab (an S Corporation), and receives a salary from the corporation.

Question 1: Can Dr. establish a qualified retirement plan on his self-employment income without covering the employees of the corporation?

Question 2: Can the corporation establish a qualified retirement plan without giving consideration to Dr.'s self employment income?
Answer: This is actually a classic common control situation. The Dr. owns 80% of a corporation and 100% of a sole proprietorship. Regardless of the type of business involved or any other actor,that makes the two businesses under common control under IRC 414(c).
To answer the questions posed here requires us to understand what it means to be under common control, or in a controlled group. It means that all employees of both businesses are treated as though they were employed by a single employer. Think of them as one employer with two separate offices.
So, can the doctor set up a plan for the sole proprietorship without covering the corporate employees? Certainly he can, so long as he can pass the various qualification tests of the Code, given that the workers in the corporation are employees, just as though they were on his personal payroll. But if there are 8 NHCE's working for the sole proprietorship and 2 working for the corporation, he'd have no problems excluding the corporate employees. However, if the numbers were reversed, then he'd have some real problems.

Similarly, can the doctor set up a plan which does not take into ccount the sole proprietorship income? Certainly he can, just as he could set up a plan that took into account his salary and not his bonus from the corporation.

Once you think of these businesses as different divisions of the same entity for plan purposes, it makes the issues much clearer.

Incidentally, common control situations are discussed at length in Chapter 12 of my book, Who's the Employer?.

Important notice:

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.