Family Attribution - counting service

A dentist had his dentist son working for him for two years as a 1099 independent contractor.  He had a retirement plan and the all of his employees were covered.  The son now wants to start his own plan and wants to have dad's employees wait until they satisfy the service requirement for him before entering his plan, however he wants to count the service as an independent contractor in order to participate in the plan.  It would seem that if he counts his service that he would have to count the service for dad's employees under either family attribution or possibly ASG.  Any thoughts on whether what he is trying to do is possible?

Who is the plan sponsor of the new plan? Who is the employer? Is the son starting his own practice and hiring the employees away from the exiting business?

The plan sponsor of the new plan is the son, who is the new employer. He bought the practice from his father and is continuing to employ the employees of his father's practice.

So we have a double whammy

He cannot disregard the EEs service just because he didn't own it at the time

He cannot count his time as an IC because he wasn't an employee 

It appears he is trying to credit predecessor service for himself, even though he was not an employee (as RBG stated), and ignore service for the others. This does not work.

From the EOB:

2.b. Granting of pre-participation service. Pre-participation service means any service prior to the employee's commencement (or recommencement) of participation, with the employer maintaining the plan or with a prior employer. For the granting of pre-participation service to be nondiscriminatory, the provision must apply to all similarly-situated employees, there must be a legitimate business reason to grant the service, and there must not be significant discrimination in favor of HCEs, neither by design nor by plan operation, resulting from such grant of service. Treas. Reg. §1.401(a)(4)-11(d)(3)(iii).

"It appears he is trying to credit predecessor service for himself, even though he was not an employee (as RBG stated), and ignore service for the others."

You can't always get what you want.  Especially if it violates the non-discrimination rules.

Just spit balling here but why can't he count is service as an independent contractor?  If he owns a company now isn't his time as a sole proprietor part of his controlled group?  I am not sure of this as I can't remember the last time I did a plan for an unincorporated business.  But the claim isn't he gets to count the service with his father's business but as his own business before he purchased the father's business. 

After all he could have set up a KEOGH or a solo 4k plan for the two years he was an independent contractor.  Had he done so he would have gotten two years of service in that plan. 

Maybe the question is can you count service for vesting before the plan exists and I think you can do so.  I know he could write the plan for the new company to say all employees employed as of 1/1/2017 (or whatever year he set up the plan) enters on 1/1/2017.  So can he count the service before the plan exists for plan entry. 

I am not sure the rest of you aren't looking at this incorrectly in terms of what business the prior service one ought to look to.  It can't be the father's but he had a business for 2 years as an independent contractor. 

I am ignoring the employees for the father's plan at this point as that seems covered. 

Was the purchase of the father's business an asset purchase or a stock purchase?

Does that make a difference in terms of counting his service as an independent contractor? 

It was an asset purchase. I think we were going on the premise that he could count his two years of service as a predecessor org, but we didn't believe he could avoid counting the service for the employees and that seems to be confirmed in this thread.

5 hours ago, jvajjm750 said:

The son now wants to start his own plan and wants to have dad's employees wait until they satisfy the service requirement for him before entering his plan; however he wants to count the service as an independent contractor in order to participate in the plan.

What a nice guy. 

Of course there are exceptions, but I wonder what it is about the medical professions and the greed factor. No other class of for-profit employers that I deal with so consistently leaves no stone unturned in the effort to favor themselves and shaft their employees. Is it part of the curriculum at medical school?

Yes, that is part of the teaching (sic), as well as the pessimistic view that no matter how many years in a row you make 1/2 or 3/4 of a million dollars, that next year it could be slashed to "only" a few hundred thousand a cause a struggle to survive, and finally, of course, professional investment management, because we all know doctors are experts there as well! Sorry, it's cynical Thursday.

Employees in for sure, and yes, could count his private practice/self employed service as well, but should be in document. 

Are the employees in for sure?  That was my first reaction but as more details are coming out, I'm not so sure.  Depending on other unknown details, why couldn't son require a year of service?

1.  It is an asset sale.

2.  Son wants to start a new plan.

In an asset sale, the employees have severed employment with dad's company and are now new employees of son's company.  He does not have to credit service in dad's company for the new plan in his company. 

Oh, if it is a new plan sponsored by a new company, they can probably exclude the employees until they have a year of service with the new company.  Don't have to count service with a prior employer.

What they CANNOT do is count service with the prior company for the new owner but not for everyone else.  So if everyone else has to wait a year to become participants in what is (presumably) intended to be a qualified plan, there is no possibility of the new owner not also having to wait a year.  NONE.

3 minutes ago, My 2 cents said:

Oh, if it is a new plan sponsored by a new company, they can probably exclude the employees until they have a year of service with the new company.  Don't have to count service with a prior employer.

What they CANNOT do is count service with the prior company for the new owner but not for everyone else.  So if everyone else has to wait a year to become participants in what is (presumably) intended to be a qualified plan, there is no possibility of the new owner not also having to wait a year.  NONE.

Son was never an employee of dad's practice, he was an IC.  So maybe he was a sole prop as an IC and counts that prior service but not prior service at dad's practice...

5 hours ago, Belgarath said:

Of course there are exceptions, but I wonder what it is about the medical professions and the greed factor. No other class of for-profit employers that I deal with so consistently leaves no stone unturned in the effort to favor themselves and shaft their employees. Is it part of the curriculum at medical school?

I think "greed" is part of the filtering for who decides to become a physician.

I can't believe no one has latched on to the real problem here.  More than likely, he was NOT an independent contractor, but a misclassified employee of his father's practice.  I'm willing to bet that an analysis of his "practice" will show he was an employee of his father's practice.  I had dental clients years ago who had dentists treated as "independent contractors".  I told them that they were at risk, but they continue to treat them as ICs. That is, until they were caught and the 2 partners had to pony up over $100k EACH for all the penalties associated with misclassifying employees.  Ever since Microsoft got caught with the same problem, most plan documents have language that says if an employee who was thought NOT to be an employee is found to be an actual employee, they are still not eligible for the plan.  Of course, this means the plan now has to pass non-discrimination while counting those individuals as employees.  It may not be a problem if they would have been paid enough to be HCEs, but if they only made $100k a year, then they are going to count against all the tests because they are NHCEs getting zero.

Anyway, I think he's taking a big risk in not just crediting time with his father's firm for everyone; I probably would not handle the case if he didn't agree to do that.

Larry.

I remember having several doctor clients in the early '80s.  They told me that every Jan 1st, they had a new $250k malpractice liability insurance premium to cover.  They probably saw 4 patients an hour for 7-8 hours straight, 5-6 days per week.  Can only imagine what that same premium is now.  Their practices were practically unsalable.  Yeah, they took down some big $, but they helped a lot of people and worked their butts off.  A Google coder makes more without a day of medical school.  Just saying...

54 minutes ago, Larry Starr said:

I can't believe no one has latched on to the real problem here.  More than likely, he was NOT an independent contractor, but a misclassified employee of his father's practice.

It crossed my mind as being true as I used to be an IRS and this smelled bad.  But I am not sure there is anything one can do about it now.

1 minute ago, ESOP Guy said:

It crossed my mind as being true as I used to be an IRS and this smelled bad.  But I am not sure there is anything one can do about it now.

He can not make things worse by just including the predecessor entity for everyone.

Derrin Watson has offered this:

https://benefitslink.com/cgi-bin/qa.cgi?db=qa_who_is_employer&id=346