Is there an affiliated service group issue here?

client is a single member LLC which holds a 5% interest in a retail store organized as an LLC partnership

her share of partnership income (all active) is reflected on K1 to the single member LLC

can she have her own qualified plan for her LLC income?

Thanks

Under an old, still-proposed section of the 414(o) regs, from 30+ years ago, you'd seem to have a leased owner. They were proposed with a retro effective date. 30+ years ago.

Also, are retail stores considered service organizations?

6 hours ago, Bri said:

Also, are retail stores considered service organizations?

Brie, certainly not. But leased owner did/does not require service org, just "service recipient" and 5% owner providing non-employee services to it. See Prop. Reg. 1.414(o)-1(b).

22 minutes ago, Luke Bailey said:

Brie, certainly not. But leased owner did/does not require service org, just "service recipient" and 5% owner providing non-employee services to it. See Prop. Reg. 1.414(o)-1(b).

Do you mean CFR 414(n)-1(b)?  I can't find any regulations for 414(o) since (o) is the requirement to provide regulations😁

6 hours ago, Nate S said:

Do you mean CFR 414(n)-1(b)?  I can't find any regulations for 414(o) since (o) is the requirement to provide regulations😁

Nate S, no, I mean Prop. Reg. 1.414(o)-1(b). It was proposed 30+ years ago, and never withdrawn. The other regs proposed under 414(o) were withdrawn. I think what the IRS was getting at was that they viewed it as abusive for someone who owned 5% or more of a business to provide services to the business as an independent contractor and use the 1099 income to fund their own retirement plan, e.g. a DB plan. Where the rule would apply, it does not taint the entrepeneur's entire plan, just says that they can't use the 1099 income from the business they own 5% or more of as earned income for purposes of calculating their benefit under their plan. They would have to have income from other entities, that they owned less than 5% of, to fund their benefit.

It's only proposed and obviously has not been on the front burner for finalization. But it is out there, and as proposed it did not have a prospective effective date.

15 hours ago, Luke Bailey said:

Nate S, no, I mean Prop. Reg. 1.414(o)-1(b). It was proposed 30+ years ago, and never withdrawn. The other regs proposed under 414(o) were withdrawn. I think what the IRS was getting at was that they viewed it as abusive for someone who owned 5% or more of a business to provide services to the business as an independent contractor and use the 1099 income to fund their own retirement plan, e.g. a DB plan. Where the rule would apply, it does not taint the entrepeneur's entire plan, just says that they can't use the 1099 income from the business they own 5% or more of as earned income for purposes of calculating their benefit under their plan. They would have to have income from other entities, that they owned less than 5% of, to fund their benefit.

It's only proposed and obviously has not been on the front burner for finalization. But it is out there, and as proposed it did not have a prospective effective date.

 

 

I can certainly understand that viewpoint, and have probably drawn that distinction on another basis.  Is the 5% ownership and full-time service enough of a distinction or would their service also have to provide for a certain level of revenue generation? 

And while we're here, what about under a partnership where the pass-through is already earned income?  Specifically law firms, where a junior partner may be limited or outright excluded from some allocation classes such as top-heavy, safe harbor, or a match.  Would they then instead be able to fund a plan of their own, to at least make up for those exclusions presuming that if you combined the testing it would still pass non-discrimination?

7 hours ago, Nate S said:

And while we're here, what about under a partnership where the pass-through is already earned income?  Specifically law firms, where a junior partner may be limited or outright excluded from some allocation classes such as top-heavy, safe harbor, or a match.  Would they then instead be able to fund a plan of their own, to at least make up for those exclusions presuming that if you combined the testing it would still pass non-discrimination?

Nate S, in this situation the junior partner, as you call them, would not be able to have his or her own plan. You don't even have to get into the A group affiliated service group rules (which would otherwise apply), because being a partner in a partnership is not a separate trade or business, and the only earned income that the junior partner could use to fund a plan would be the earned income from the partnership, and the partnership is therefore the only trade or business that could sponsor a plan covering the junior partner. The trick with the leased owner situation that the leased owner rule is/was trying to solve is that if you are an independent contractor to a business, even if you own 5% or more of it, then your being an independent contractor is  in most situations going to be a separate trade or business that could sponsor a plan for you, plus if the business you are providing your independent contractor services to is not a service business (which would be the only time you would want to do this), the affiliated service group rules would not apply. That's a decent loophole, which is why the IRS left that one part of the 414(o) regs out there as still proposed, even though it withdrew the rest. Of course, the IRS could also challenge whether the services are really those of an independent contractor, as opposed to employee services, although probably in a lot of cases the types of services provided by the leased owner to the business that they own 5% or more of would legitimately be independent contractor services. Also, to make this work the leased owner would have to have other streams of income for their sole proprietorship, otherwise they would probably be in a 414(m)(5) management services group with the service recipient. There are no regulations, even proposed, under 414(m)(5) (the regs that were proposed were withdrawn long ago), but 414(m)(5) is currently in effect through just its statutory language.