§414 Controlled Group and Affiliated Service Group Planning To Minimize §410(b) Coverage Requirements

Success Story

Richard was a partner in a 7 partner consulting firm.  The firm was exploring various retirement plan alternatives, but none  satisfied Richard's retirement savings objectives.  The affiliated service group rules of §414(m) created obstacles which the partners could not overcome.  We were asked to review the situation and suggested that Richard incorporate his partnership interest in the consulting firm, have the corporation adopt a low cost ESOP, and concurrently sell his new corporation to the ESOP for an installment note (i.e., an ESOP Loan) at fair market value as determined by an independent appraiser.  Under the rules of §414(m), Richard's corporation was no longer a member of an affiliated service group once it was owned by the ESOP, which conclusion the IRS approved.  Of course, the real objective here was to get Richard into a DBPP, which was accomplished. Since Richard's corporation was making contributions to his DBPP, he was limited to his §401(k) Salary Deferrals plus 6% of his compensation in making contributions to his ESOP, but these amounts were sufficient to make the annual payments on the ESOP Loan.  Richard's partners soon followed.  The consulting partnership provided a generous §401(k) Plan to the non-professional employees, but the plan admittedly was not comparable to the plans adopted by the incorporated partners.