Company X owned by 2 separate S-Corps

A CPA came to me with this scenario...

She and her partner own an accounting firm (Company X)
The accounting firm is owned by her S Corp (Company A) and her partner's S Corp (Company B)

Accounting firm ownership % is Company A 25%, Company B 75%

Company A owner earns W2 wages from Company X, Company B owner takes his Company X compensation in the form of a K1 to Company B

They want to setup a 401(k) plan for Company X.  

Q1 - I don't see any problem there... Company X pays it's employees and they can defer if they want.  Correct?

Q2 - In this scenario do we have to include all 3 companies?  
I don't see a control group

Q3 - Can each company have their own plan?

I guess what is throwing me is that the S Corps own the accounting firm, not individuals.  Does that make a difference?  Am I missing anything?
 

Doesn't look like a controlled group to me.

Do you have an Affiliated Service Group here?

As for setting up a Plan for X assuming the Partner who owns company B (and then company B owns 75% of X) is the only employee of Company B then excluding company B won't be a problem as company B only employees HCEs and you can discriminate against HCEs.

Now if A or B wants to set up it's own plan that's when you need to look and see if you have an affiliated service group or not.

No there is no affiliated service group.  Both A & B are single member companies.  They are both CPAs..  IDK why they set it up like this.  I didn't see it as an issue after talking it through with another pension professional.  Just getting other opinions.  Thanks

17 hours ago, shERPA said:

How can A, B and X not be an affiliated service group?

The answer, we know, is that it has to be an ASG. It's a classic, textbook ASG.

Really?  I was just reading up on ASG.  Is there some kind of grid to complete that helps determine yes or no?  Maybe a good clear example?  I will ask more questions of the owners but it is my understanding that both S-corps are just owners of X.  They do not perform any services for X or draw business from X.  All 3 businesses are accounting firms.  All stand alone businesses.   

Thanks for questioning me.  I want to give this potential new client the right answer.

Quote

 Company B owner takes his Company X compensation in the form of a K1 to Company B

Here it is right here.  And if B is getting a K-1, so is A, because S-corp profits must be distributed in proportion to shares of stock.   Basically what you have is a partnership of professional corporations, which is the classic ASG as Bill said.  Except that the "partnership" is organized as an S-corp., but it's still a service org, it is probably a professional organization and therefore an A-org FSO, but even it it's not, A and B would be professional corps so they can be the FSO. 

Allll Righty then!  If that is all it takes then an ASG. 

Question...  in an ASG does there not have to be any reciprocal services performed?  Can it simply be that the 2 S-corps own company X and that alone will make it an A-org FSO? 

Here is a follow-up question that the client sent to me regarding contribution....

would the contribution for the owners be based on the net income of the partnership? Or on the W2 wages paid out of the S corporations that hold the ownership in the partnership?

Contributions are based on compensation... so W2 wages.. right?

Damn... and what I understand is that one partner earns W2 wages from the partnership and of course her S-Corp.  The other only from his S-Corp.  When you have this situation, do you combine W2 income she gets from both places (partnership and S-Corp) to determine her total comp? And contribution wise pro rate it between the 2 businesses?

And... if this plan comes to fruition the best option would be to setup the plan as a new comp with everyone in their own group.  Best bang for the buck for the owners.

THANKS!  Always learning.

Yes, plans use W-2 wages.

To clarify, Company X, "the partnership" - is an actual partnership filing a form 1065 partnership return?   And there are only two partners of this partnership, Companies A and B, both of which are S corps?  And X issues just two K-1s, one to each S-corp.  Correct?

It's not clear why one of the S-corp shareholders (the individuals are not technically the partners in X, their corps are the partners) is also getting a W-2 from the partnership, this seems like a needless complication and a good way to increase payroll tax costs.  But since it is an ASG, the group of companies are considered a single employer, so yes I'd combine the W-2 amounts for plan compensation assuming all entities have adopted the plan.

Answers could change if the facts change.

The partnership has rank and file employees.  I have been given the following facts:

• Partnership has 6 or so rank and file employees
• One of the S-corp owners also receives W2 wages from the partnership 
• Other partner only receives a K1 from the partnership 

How does that change the circumstances?

W-2 wages and Self Employment earning are eligible for wages for pensions contributions.

Pass through S-corp earnings are not eligible wages for pensions.

13 hours ago, K-t-F said:

The partnership has rank and file employees.  I have been given the following facts:

• Partnership has 6 or so rank and file employees
• One of the S-corp owners also receives W2 wages from the partnership 
• Other partner only receives a K1 from the partnership 

How does that change the circumstances?

When you say "other partner only receives a K1 from the partnership" you need to keep clear exactly who that partner is. You've indicated it's an S Corp and not a person. So it's irrelevant.

I am really sorry for beating this horse.  I am a very visual person.  I've attached a quick "schematic" of this situation. 

The goal is to have a plan for Company X for the employees. If A and B need to be included, so be it.  Gotta do it right.

If you look at my schematic attached you will see that Betty receives W2 income from X and wants to participate.  Dave is just the owner of S-Corp B, no W2 from X.  

Dave wants to have a plan through his own S-Corp.  (sheesh, he may already have one)

I am no CPA... S-Corps owning other businesses... above my pay grade how you set that up.  I get that each S-Corp will be paid their share of the profits from X via a K-1. 

Bottom line, they want a plan for X... do we need to include A and B (ASG)? and if so we just count everyone involved as is they were all part of one big company.. correct?

Sorry to recap.  Just want to put the facts out there.

20 hours ago, Bill Presson said:

When you say "other partner only receives a K1 from the partnership" you need to keep clear exactly who that partner is. You've indicated it's an S Corp and not a person. So it's irrelevant.

By irrelevant, I mean the k-1 amount, not the entity. This is a pretty classic ASG. I'm betting that they are paying Betty a w-2 from Company X, because the k-1 to S Corp A is 25% of the total and the k-1 to S Corp B is 75% of the total. That's their way of evening things up. Company X should be the sponsor with S Corp A & B as participating employers. Everyone would be getting w-2 comp from one of the entities, so it's a pretty easy allocation.

Thankyou.  

For contributions each entity pays their own share.  That is, if Betty earns compensation from her S-Corp then her S-Corp pays the contribution while at the same time Company X pays the contribution for her Company X W2 wages.  It makes sense... just crossing my "T"s.