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By John Wolf and Tom Cullen CPA
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Controlled Business
Where an owner-employee controls (either as a sole proprietor or as a more than 50% partner). One unincorporated business and participates as an owner-employee in the Keogh plan of another unincorporated business, whether he or she controls the second business, he or she must establish a plan for the regular employees of the business that they control with benefits or contributions similar to those which they are receiving. Therefore, if a 10% or less partner participates in a Keogh plan, they do not need to establish a similar plan for the sole proprietorship that they own. If the individual in question controls more than one business, they must treat the controlled businesses as one for purposes of figuring the maximum contribution that they can make for themselves. An owner-employee maximum contribution limit cannot be exceeded even though they participate in more than one plan. That is to say, participation in two plans does not double the allowable deduction.
Coronavirus-related distributions. Section 2202(a)(4)(A) of the CARES Act defines a coronavirus-related distribution as any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020, to a Qualified Individual (defined later). The amount of aggregate distributions from all eligible retirement plans that can be treated as a coronavirus-related distribution is limited to no more than $100,000. See Coronavirus-Related Distributions,
Publication 560 (2020), Retirement Plans for Small Business
General Limitations
Under the provisions of ERISA, all businesses that are under common control, including incorporated businesses, unincorporated businesses, estates, and trusts, must be aggregated for purposes of the limitations on benefits, contributions, participation, and vesting. The regulations to §414(b) and (c) state that the percentage to be applied to determine if there is common control are 80% in the case of parent-subsidiary controlled groups and the 80% and more than 50% tests for brother-sister controlled groups.
As a result of ERISA, corporate and non-corporate employees are taxed alike on their distributions. An owner-employees cost basis does not include any taxable or non-deductible term cost charges when a Keogh plan has been funded with life insurance. The beneficiary of a deceased self-employed person or owner-employee will be taxed in the same manner as the deceased would have been taxed. When life insurance proceeds are paid as a death benefit, the excess of the proceeds over the policy’s cash value will be tax-free.
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Effect of Incorporation
A partnership or sole proprietorship may have an existing Keogh plan at the time of incorporation. Since a qualified corporate plan will be created, the following alternatives concerning the disposition of the Keogh account should be considered:
1. The plan may be frozen. All employer and employee contributions simply stop. Life insurance or annuity contracts may be placed on a reduced, paid-up basis, but the extended term insurance option for life insurance in as much as immediate taxability may result to the self-employed. The assets in the plan or trust will continue to share in dividends, interest and capital appreciation on a tax-free basis. Distributions to self-employed and regular employees will continue to be governed by the plan’s provisions and the IRC restrictions. This approach is frequently used although the continued maintenance of the plan or trust typically requires the payment of administrative fees and annual reporting to the IRS.
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2. The assets in the Keogh trust may be sold and the proceeds used by the trustee to purchase single premium nontransferable deferred annuities. These annuities can then be distributed tax-free to the participants who will be taxed only upon the surrender of the annuities or the commencement of payments. Also, the trustee may continue to hold the annuities.
3. The assets of the Keogh plan may be transferred by the trustee, to the trustee of a qualified corporate account. The transferred Keogh assets must remain segregated from the corporate assets. This will probably increase the administrative costs somewhat. It is important that any such transfer is made only between the trustees or custodians of the two plans involved. It may also be possible to arrange for the transfer of a nontransferable annuity or retirement income endowment policy that is not held by a trustee or custodian (PLR 8332155).
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4. Nontransferable annuity contracts which are part of an unincorporated plan and are not held by a trustee may be surrendered back to the insurer in consideration for which the insurer will issue new policies to the trustee of the qualified corporate plan (R. R. 73-259).
5. When the Keogh trust owns life insurance contracts, a sale of the contracts for their cash values to the trustee of a corporate plan is permissible since there is a fair exchange of values (R. R. 73-503). The life insurance contracts now held by the trustee of the corporate plan are no longer subject to any of the Keogh plan restrictions.
6. A self-employed individual or an owner-employee who receives a qualified lump-sum distribution in cash or property from his Keogh plan may make a tax-free rollover of all or part of the property or cash to an IRA or annuity. The rollover may not be made into an endowment contract and must be made within the 60-day period. 7-39
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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only.