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Catch-up and 415 Limit for participant who participates in two 401(k) plans sponsored by unrelated entities


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Posted

I have a client who owns 40% of 3 car dealerships, the other 60% is owned by his father-in-law (30%) and uncle-in-law (30%). He then owns 100% of 4 other dealerships. He has two 401(k) plans that we administer, one plan covers the entities he owns 40% and the other plan covers the entities he owns 100%. With respect to this situation I have the following questions:

1. I have done controlled group analysis and have determined that the 3 dealerships he owns 40% are not part of the same controlled group as the entities he owns 100%; does this appear to be right? Am I missing anything? I don't think affiliated service groups applies since a car dealership isn't a service entity and I don't think a management group applies because he gets paid a W2 from each dealership, he doesn't have the dealerships pay a management company that he owns (also, I am not sure if it is a requirement for the business to be a service company to be part of a management group). 

2. We have been allocating a profit sharing contribution for each plan and since I think both plans are unrelated he has a separate 415 limit in each one. One plan he does his max deferral and gets a match and maxes out to the 415 limit via profit sharing and then the other we just allocate a profit sharing contribution and max out to the 415 limit. However, he just turned 50 in 2022 so he is eligible for catch-up. My question is, if we had him fund the normal 402(g) limit (22,500 for 2023) to one plan without catch-up and then fund the catch-up (7,500) to the other plan, could he fund $73,500 to each plan? It seems wrong because he is basically using the catch-up limit twice (each plan would be using 7,500 of catch-up) but he isn't going over the 402(g) limit (he would only be funding 30,000 total in deferrals between both plans). 

Hopefully my questions make sense, let me know if I need to clarify anything. 

Thanks, 

 

 

Posted

On #1 unless there are facts not disclosed I agree, no controlled group.

On #2, interesting. As long as he isn't over the 30,000 limit and has at least $7,500 in deferrals to each plan I see no problem with what you are describing. It's an interesting loophole but it doesn't look problematic under the code.

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