Is my LLC a Control Group or Affiliated Service Group for 401K purposes?

[SaraHilty]

My husband has a health clinic that makes a healthy $350k in revenue each year.  We also own an LLC that leases the real estate and building to the health clinic (an S Corp).  We offered a 401K to the health clinic employees for years, but no one seems to really be using it.  We'd like to shut it down, and simply keep our 401K with our Real Estate LLC.  (we're the only owners of that and the clinic S Corp).  But seems like we'd be an Affiliated Service Group or Control Group.

HOWEVER, I did read somewhere that a related business with capital and non service offerings would not count as a CG or ASG, is this true?  They said it only applies to service companies.  But seems like its too good to be true, because then any practice could separate their land / building into an LLC and make payments to it.  So not sure if there is anything we can do besides a Safe Harbor contribution to enable ourselves to continue contributing to our 401K?

And then do an HSA and Backdoor Roth IRA?  And I guess contribute on both husband and wife's behalf, so that's:

$18K + 4% Safe Harbor each + HSA + Backdoor Roth IRA?

 

I was also told that if I make money from books that I publish (which have nothing to do with medicine), I can't contribute to that 401K separately either, ie even if it has NOTHING to do with our health clinic or medical profession, the authorship earnings still count as part of the CG?  That seems unfair?

[spiritrider]

It is likely a moot point anyway. The real estate LLC almost certainly produces passive income. Earned income is required for business retirement plan contributions.

Fairness is in the eye of the beholder and has no bearing on tax law.

[jfoxcpacfp]

To add to @spiritrider, you cannot start a second business (book publishing) and contribute to a 401k through it to the exclusion of the employees in your first business. You are treated as the owner of the first business under the rules of attribution.

[litovskyassetmanagement]

spiritrider wrote:

It is likely a moot point anyway. The real estate LLC almost certainly produces passive income. Earned income is required for business retirement plan contributions.

Fairness is in the eye of the beholder and has no bearing on tax law.

Click to expand...

Exactly.

1) Can't use real estate LLC income for retirement plan contribution.

2) Even if you could do that, it would be a controlled group, so you couldn't just open a plan for the LLC and close one for the practice.

As far as low participation, this might have to do with the following:

1) Lack of education (responsibility of the plan sponsor).

2) Lack of good investment options that are easy to understand.

3) Simply lack of income on the part of participants (this happens quite often).

Though we find that with a match many would participate.  So I would first figure out how to improve your practice plan, that's the most practical thing to do in my opinion.