C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

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BrianJM
Posts: 32
Joined: Sat Jul 12, 2014 1:30 pm

C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

Post by BrianJM »

I have been researching how a specific business structure impacts the ability to for an owner to utilize a Solo 401(k). Needless to say, I can’t find much information on this scenario (in a form I understand). I am hoping someone here has a similar business structure can provide guidance based on their experience. I appreciate any feedback that can be provided.

The business structure is essentially a holdings company with several subsidiaries:
  • The holdings company is a C Corp and the subsidiaries are LLCs (wholly owned by the C C orp).
  • The C Corp has a single owner that is paid a salary by the C Corp.
  • The C Corp owner actively participates in the daily activities of the subsidiaries and charges a management fee to the subsidiaries.
  • The subsidiaries do not currently have employees but will in the future. Employees of a subsidiary will be paid by the subsidiary as a W-2 employee.
If the subsidiaries do not have any employees, the solo 401(k) participation by the C Corp owner is straight forward regarding compliance. (This can be done.)

I become confused when employees are hired by the subsidiaries. A subsidiary will pay employees directly from the subsidiary as W-2 employees, which may have different employee benefits packages than the C Corp parent. Is the C Corp owner able to participate in a solo 401(k) while the subsidiaries’ W-2 employees have a standard 401(k) offering?
ERISA Stone
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Joined: Tue Jun 24, 2014 8:54 am

Re: C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

Post by ERISA Stone »

Unless I'm missing something, how is this not a controlled group?
Topic Author
BrianJM
Posts: 32
Joined: Sat Jul 12, 2014 1:30 pm

Re: C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

Post by BrianJM »

ERISA Stone wrote: Thu Dec 07, 2017 2:44 pm Unless I'm missing something, how is this not a controlled group?
After reading your response, I looked into controlled groups in more detail. As you know, you are correct in that this is a controlled group. Thank you.
Spirit Rider
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Joined: Fri Mar 02, 2007 1:39 pm

Re: C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

Post by Spirit Rider »

Even though this is a control group. With no eligible employees nothing prevents you from adopting a one-participant 401k for 2017 before 12/31. You would have until the corporation's tax filing date including extensions to make employer contribution of up to 25% of your W-2 wages.

Unfortunately, employee deferrals must come from compensation not already received. You would need to run roughly a $20K payroll with a pay date on or before 12/31 to be able to make the maximum $18K employee deferral.

You could also select employee eligibility restrictions (not Vanguard's Individual 401k). These can be >= age 21, a one year service requirement >= 1,000 hours per year. You can opt to not have these apply to current employees (you). This would allow you in the future to hire employees < age 21 and/or < 1,000 hours/year and still maintain the one-participant 401k plan. Once you hire someone who does not meet these restrictions, you would have one year to terminate the one-participant 401k plan, change to a standard 401k plan or maybe adopt a SIMPLE IRA.
Topic Author
BrianJM
Posts: 32
Joined: Sat Jul 12, 2014 1:30 pm

Re: C Corp owner participation in solo 401(k) when wholly-owned subsidiaries have W-2 employees

Post by BrianJM »

Spirit Rider wrote: Thu Dec 07, 2017 7:06 pm Even though this is a control group. With no eligible employees nothing prevents you from adopting a one-participant 401k for 2017 before 12/31. You would have until the corporation's tax filing date including extensions to make employer contribution of up to 25% of your W-2 wages.

Unfortunately, employee deferrals must come from compensation not already received. You would need to run roughly a $20K payroll with a pay date on or before 12/31 to be able to make the maximum $18K employee deferral.

You could also select employee eligibility restrictions (not Vanguard's Individual 401k). These can be >= age 21, a one year service requirement >= 1,000 hours per year. You can opt to not have these apply to current employees (you). This would allow you in the future to hire employees < age 21 and/or < 1,000 hours/year and still maintain the one-participant 401k plan. Once you hire someone who does not meet these restrictions, you would have one year to terminate the one-participant 401k plan, change to a standard 401k plan or maybe adopt a SIMPLE IRA.
Thank you very much - this is helpful!
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