5500-EZ Single Member LLC & Sole Prop

Got a question from an accountant who has a client that is the 100% owner of a single member LLC taxed as a sole proprietorship.  The LLC is the sponsor of a solo-401k plan and files Form 5500-EZ.

The owner of the LLC now sits on a board of directors, and the board of directors will only pay director fees to the individual, not his LLC.  So the director fees are going to be reported on a separate schedule C.

My instinct tells me that his sole proprietorship should become a participating employer to the plan if he wants to use the director fees as the basis for contributions. 

If he does have the sole proprietorship become a participating employer, does that somehow ruin the ability to file a Form 5500-EZ?  It's the same person, just with two separate business entities that he is the 100% owner of, so I can't imagine that it would, but I can't find anything that specifically addresses this.

Thanks!

No question that his sole prop needs to adopt the plan of hte LLC.  The LLC is a real business even though it is taxed as a sole prop; it is NOT a sole prop.  His sole prop is his board of director fees.  Have the sole prop adopt the existing plan and the comp from both are aggregated for plan purposes.

He can still file the 5500-EZ.

The qualifications for filing the 5500-EZ are:

1. Covers only you (or you and your spouse) and you (or you and your spouse) own the entire business (which may be incorporated or unincorporated); or

2. Covers only one or more partners (or partners and their spouses) in a business partnership; and

3. Does not provide benefits for anyone except you (or you and your spouse) or one or more partners (or partners and their spouses).

All three requirements are still met in your situation where we have an additional adopter of the plan.

I'm not saying anything with respect to the ultimate decision as to what needs to be adopted, and when, but if you do end up with a controlled group keep in mind the instructions to the Form 5500 which includes this requirement in order to file an EZ:

...2. Does not cover a business that is a member of a  ‘‘controlled group"....

Mike, I know that used to be true, but is it still? I seem to recall that it was changed. Copy of current instructions attached - at a quick glance, I don't see that item you mention.

https://www.irs.gov/pub/irs-pdf/i5500ez.pdf

Well, I found it in the instructions to the 5500.  I could very well have pulled up a year earlier than 2017.  If nobody beats me to the punch I'll pull up the last few years and see if I can pinpoint when it changed.

Looks like it changed for 2009. Pre-2009 still had the controlled group restriction, 2009 didn't.

"Have the sole prop adopt the existing plan and the comp from both are aggregated for plan purposes"  

How does the Sole Prop actually go about adopting the plan of the LLC?  Doesn't it happen by default or are there specific actions or documents required to make it happen?

Depending on the document software, it could be automatic or it could require a Participating Employer Agreement or a Joinder Agreement.

We use what's called a "Supplemental Participation Agreement" where the new "Participating  Employer" agrees to a whole bunch of things.  It is signed by BOTH employers and the trustees as well.  Here are the terms:

        1.  Wherever a right or obligation is imposed upon the Employer by the terms of the Plan, the same shall extend to the Participating Employer as the "Employer" under the Plan and shall be separate and distinct from that imposed upon the Employer.  It is the intention of the parties that the Participating Employer shall be a party to the Plan and treated in all respects as the Employer thereunder, with its employees to be considered as the Employees or Participants, as the case may be, thereunder.  However, the participation of the Participating Employer in the Plan shall in no way diminish, augment, modify, or in any way affect the rights and duties of the Employer, its Employees, or Participants, under the Plan.

        2.  The Trustees hereby agree to receive and allocate contributions made to the Plan by the Employer and by the Participating Employer, as well as to do and perform all acts that are necessary to keep records and accounts of all funds held for Participants who are Employees of the respective employers.

        3.  The execution of the Agreement by the Participating Employer shall be construed as the adoption of the Plan in every respect as if said Plan had this date been executed between the Participating Employer and the Trustees, except as otherwise expressly provided herein or in any amendment that may subsequently be adopted hereto.

        4.  All actions required by the Plan and Trust to be taken by the Employer shall be effective with respect to the Participating Employer if taken by the Employer and pursuant to Plan Section 11.3, the Participating Employer hereby irrevocably designates the Employer as its agent for such purposes.

        5.  The Fiscal Year of the Participating Employer means the Participating Employer’s accounting year of twelve (12) months commencing on    January 1    of each year and ending on the following   December 31 .