Affiliated Service Group - B-Organization?

I have a client who wants to open a Solo 401(k) for his S corporation; He is a real estate agent and the S corporation is the entity that gets the agents portion of the real estate commission. However, he owns 33% interest in the brokerage firm that he sells out of (the brokerage firm is a partnership) and he owns this interest individually. The brokerage firm pays his S corporation the real estate sales commission when a property is sold. The brokerage firm has 3 employees. It is very common in real estate for real estate agents to be independent contractors and have their own entities separate from the brokerage firm that they represent. In this case though he has an ownership in both his real estate entity that he uses for houses he sells and he has ownership in the brokerage firm.

I have determined that there isn't an A-organization relationship because the S corporation doesn't have an ownership interest in the brokerage firm and vice versa. I also don't think there is a management group because the S Corporation doesn't get paid to provide management services to the brokerage firm or vice versa. 

I originally thought that this would have been a B organization with the S corporation being the B-org and the brokerage firm being the FSO until I read the following from the ERISA Outline Book:

• 1.a. Significant portion test. The B-Organization must derive a significant portion of its business from the performance of services for the FSO, or for the A-Organization(s) related to that FSO, or any combination of such organizations. Notice that the indirect service test under the A-Organization definition (i.e., regular association in providing service for third persons) is not applicable here. The services performed by the B-Organization must be for the FSO and/or A-Organization(s).

The underlined portion above makes me think that in order to be a B-organization the B-Org has to provide services exclusively to the FSO and not to third persons (like people who go to a real estate agent to help them buy/sell a property). I think the argument could be made that both the S corporation and the brokerage firm are providing services to third parties and are not providing services exclusively for/to each other. Based on the wording in the ERISA Outline Book this wouldn't be an affiliated service group and the owner would be okay to open a 401(k) plan that just covers the S corporation; he wouldn't have to consider the 3 employees that work for the brokerage firm in coverage testing. 

Does anyone else have any other thoughts? Would love to see anyone else's opinion on this. 

But you have to take into account the Attribution Rules for ownership interest.  So may want to re-think the A-org aspect.  Why take this risk on -- send the guy to your ERISA attorney.  We have a good relationship with ours and he would either 1) if clear cut -- give you the go ahead or say no  and 2) if iffy but if he can make the argument -- will directly engage with the client to write the memo giving us cover.  

On 9/12/2021 at 8:36 PM, Always Complicated said:

But you have to take into account the Attribution Rules for ownership interest.

Always complicated is totally correct on that. Assuming he owns 100% of the S corp, then his ownership interest in the real estate brokerage would be attributed to the S corp. See IRC secs. 414(m)(6)(B) and 318(a)(2)(3)(C). Note that if the real estate business was a corp and not a partnership, you wouldn't have a problem because for an entity to be an FSO for A-org ASG purposes it must be a professional corporation, and licensed real estate brokers were not listed in the proposed reg as a profession for purposes of being a "professional corporation." See. Prop. reg. 1.414(m)-1(c).

If the S corp is getting payments from the real estate brokerage, then it would be viewed as performing services for it. But then you have other questions, e.g. are they both service orgs, and is the revenue significant.

Thank you for the response Always Complicated and Luke Bailey, I overlooked the Section 318 rules for attribution to an organization.