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Sole Proprietor's Employees Are Paid by Another Company
BenefitsLink Message BoardsLink to more items from this source
Sept. 29, 2021

"John Doe, Sole Proprietor, sponsors a 401k plan, using a volume submitter pre-approved document. John has several employees, all covered under the plan, everything seems fine. However, it turns out that unbeknownst to the prior TPA (and if there's a problem, likely not their fault, as apparently neither client nor CPA ever informed them) the employees of John are actually PAID through another company. Details on this other company not yet known, but apparently has a different EIN than John. The reasons why it's handled this way are unknown. The CPA likely had good reasons for it. I'm not making any judgments since this is outside my sphere of knowledge.

Now, my understanding has always been that the IRS will only issue one EIN to a sole proprietor. If that's correct then this other company, apparently 100% owned by John, must be something other than a sole proprietorship.

At any rate, my question is this: Assuming these are 'employees' of John, is the fact that payroll is run through another company in the controlled group a problem in and of itself? This other company has NOT signed on as a Participating Employer, and the document provides that employees of another member of a controlled group are not covered under the plan unless a Participating Employer Agreement has been signed. Although it's the CPA's purview, can John deduct contributions if payroll is through another company?

I'd love to hear any thoughts on the situation. Thanks in advance."

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