Defined benefit plans are complex enough when you only have one business entity. But what if you own multiple businesses?
When a solo business owner has many business interests, complexity increases. Questions arise about which businesses to include in the plan and which entity will take the tax deductions.
In this article, we will discuss these critical issues and also tell you when you’ll need to amend plan documents to reflect your intentions accurately. Let’s jump in!
Background
If you own multiple businesses, retirement plan rules treat them as a single employer in many cases. This is based on control group rules under the Internal Revenue Code. These rules determine whether businesses must be combined for retirement plan purposes.
A controlled group generally exists when there is common ownership above certain thresholds. This includes parent-subsidiary and brother-sister ownership structures. If the rules apply, all businesses are treated as one employer.
This impacts defined benefit plan design, testing, and contribution deductibility. You cannot simply sponsor separate plans to isolate income or employees. The IRS requires consistency across all controlled entities.
Structuring a Single Plan Across Multiple Entities
When businesses are part of a control group, a single defined benefit plan is typically required. This plan must cover eligible employees across all participating entities. The goal is to ensure fairness and compliance with nondiscrimination rules.
Each company can adopt the plan through a formal joinder agreement. This allows multiple entities to participate under one master plan document. The joinder outlines responsibilities for contributions and administration.
From a tax perspective, contributions must be allocated properly between entities.
Each business deducts its share based on employee compensation. This ensures that deductions align with actual payroll and plan participation.
Using a Joinder Agreement to Combine Businesses
A joinder agreement is the most common method for combining businesses into one plan. It formally brings each entity into the retirement plan structure. Without this agreement, the plan may not properly cover all required employees.
The agreement specifies how each company participates in the plan. It includes details on contributions, eligibility, and administrative responsibilities. This creates clarity and reduces compliance risks.
For tax deductibility, all controlled group members must be included properly. If one entity is omitted, deductions could be disallowed. This is a common issue when businesses are not coordinated correctly.
Excluding a Business From the Plan
In some cases, you may want to exclude one business from the retirement plan.
This is possible, but it requires a specific election in the plan document. The exclusion must be clearly defined and properly documented.
If no election is made, control group rules will automatically apply. This means all businesses must be included in the plan. Failure to include them can create compliance and deduction issues.
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Excluding a business can be useful for strategic planning purposes. For example, a company with many employees may be excluded. However, this decision must be carefully evaluated with an advisor.
Contribution and Deduction Considerations
Defined benefit plan contributions are based on actuarial calculations. These calculations consider age, compensation, and retirement goals. When multiple businesses are involved, coordination becomes more complex.
Each entity must fund its portion of the plan liability. This is typically based on the employees it sponsors. Proper allocation ensures accurate deductions for each business.
Below is a simple example of how contributions may be allocated:
| Business | Entity Type | Employees Covered | Payroll | Annual Contribution |
|---|---|---|---|---|
| Company A | S-Corp | 3 | $300,000 | $150,000 |
| Company B | LLC | 2 | $200,000 | $90,000 |
| Combined | 5 | $500,000 | $240,000 |
This table shows how contributions align with payroll across entities. Each business deducts only its allocated contribution amount. This keeps the structure compliant and defensible under IRS rules.
Key Planning Strategies for Multi-Business Owners
Structuring a defined benefit plan across multiple businesses requires careful planning.
The goal is to maximize contributions while maintaining compliance. Small mistakes can lead to costly corrections or penalties.
Here are several important strategies to consider:
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- Confirm control group status before designing the plan
- Use a joinder agreement to formally include all required entities
- Allocate contributions based on payroll and participation
- Consider excluding a business only with proper plan document elections
- Coordinate plan design with overall tax and compensation strategy
- Work closely with an actuary to model contributions across entities
These strategies help ensure the plan operates efficiently and remains compliant. They also support long-term tax planning and retirement goals. Proper coordination is essential when multiple businesses are involved.
Bottom Line
Defined benefit plans can be powerful tools for business owners with multiple entities.
However, control group rules significantly impact how these plans must be structured.
Most owners will need a single plan covering all businesses.
A joinder agreement is the standard method for combining entities under one plan.
This ensures proper coverage and supports tax-deductible contributions. Failing to include all required businesses can create serious compliance issues.
Alternatively, a business can be excluded with a proper plan document election. This requires careful planning and clear documentation. Without this step, all entities are automatically included under IRS rules.
Ultimately, structuring these plans correctly requires coordination between tax advisors and actuaries. When done properly, they can generate significant tax savings and retirement benefits. The key is understanding the rules and applying them strategically across all businesses.
