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    6 Replies Latest reply on Apr 7, 2011 6:28 PM by kir

    Pension Plan Ownership of a Company

    midwestco Newbie
      On a business trip awhile back one of the seatmates in my row was explaining that he set up his company to be owned by his pension plan. Didn't think much of it until later and started thinking about the possibilities.

      In doing a little research it seemed at first like it would be possible until I got to the prohibited transaction section and disqualified persons, though this set of rules is anything but clear. The uncertainty is that the rules for prohibited transactions seems like it would preclude me from taking a salary among other things. The other things are not such an issue but not being able to take a salary would pretty much nix the whole thing.

      Can a single person pension plan be set up as owner of a business? Anybody know the answer to this?
        • Re: Pension Plan Ownership of a Company
          Lighthouse24 Ranger
          There's no info in your profile, so just to verify . . .
          Is this a U.S. business, and is the owner American?
          What's the business structure (corporation, LLC)?
          What type of business (retail, professional, real estate)?
          I ask because we had a related question several months back that got a few good responses, but none were "right" since the business/person was in Canada. Thanks.
            • Re: Pension Plan Ownership of a Company
              midwestco Newbie
              Thanks for looking in on this question. The company in question is currently an LLC though changing form would not be a problem if this could be accomplished. The company is a relatively new start-up that is involved in M&A advisory work. I am the sole owner and am a US domiciled taxpayer. One of the issues here is the boom and bust nature of our work.

              The business currently involves two individuals, (would expect to continue to add 'partners') each with their own LLC, where to date we have booked the business in one of the two LLCs and just 1009'ed the income over to the other 'partner.' Our vision is to set up a new Company, either S or LLC, to be responsible for all the contracts and revenue and then through agreement distribute that income back to each of our individual companies. In my case, this would be the existing LLC, which I would like to have as owned by a pension plan/retirement plan and from which I would pay my salary. This is essentially how the airline seatmate described how he set it up. By doing so my objective is pay myself a salary on which to live and maximize a pot of capital from which to make investments.

              While the business has been relatively modest to date, it is finally clicking and should be generating a minimum $750k to $1 million a year for each of us going forward. We also receive compensation for our services in the form of equity which if the company was owned by a pension/pIan would seemingly simplify life.
                • Re: Pension Plan Ownership of a Company
                  Lighthouse24 Ranger
                  I thought I'd had a client with a similar deal, but no. I'm not seeing the way to do it, but that doesn't mean it can't be done. I'll keep looking/asking, and post any additional info I get. If you get an answer from elsewhere (or if someone else in the community has done this), I hope you'll post here -- I'd like to know, too!
                  • Re: Pension Plan Ownership of a Company
                    dublincpa Scout
                    There are a couple different services providers that promote such retirement plans.

                    No endorsements and no affiliations:

                    I have had clients use Guidant, no problems yet but who knows. Never had any dealings with Entrust. I am sure there are others out there.

                    These plans really only work when the business has only owners and their families as W-2 employees. What is available to one has to be available to all. If you don't want your EE's to own your company, it won't fly.

                    You have to do ALL of the steps through/with them or you will screw it up. Not picking on you, but these kind of employer plans and self-directed IRAs in alternative investments bear more opportunity to screw up in small ways with magnificent consequences than anyone can imagine.

                    1. A NEW company is formed and establishes a qualified retirement plan. Can't use existing company.
                    2. Your other retirement money is rolled over into that plan.
                    3. The company issues additional stock to the plan in exchange for cash.

                    Last I heard Guidant will only let you use a C Corp because, an S Corp or LLC while permitted would require Tax on Unrelated Business Income to be paid at trust rates on the flow through income. Any net income to the plan over $8-10K would be taxed to the PLAN at 35%+ applicable state rates. They know people won't like this and won't do it, consequently hurting themselves in ugly ways. With the C Corp, the corp pays 15% to the Feds on the 1st $50K net income + whatever to the state if applicable, 7.3% in IL. The plan pays no tax on the dividend income. In an eventual sale many years down the road, the liquidation proceeds or net proceeds of the stock would not be taxable to the plan either as simple investment income.

                    Now consider if this is a Roth 401k, in which future eligible withdrawals will not be taxed. Hmmm...tasty.

                    Along the way you have to pay "reasonable" compensation and benefits to the officers etc. I think that these things will be watched like mice by hawks (IRS and DOL). There will be a lot of abuse which will cause the service to want to throw out the baby with the bath water and cause difficulties for those trying to operate on the up and up.

                    There aren't many of us that deal with these things. Feel free to email me if interested in discussing Replace at with @.

                    Good Luck.