"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."