Chapter 2 Other Employer Situations

Question 1

Define Coporation (5)

Answer 1

Separate legal entity
Owners do not recognize profit/loss
Run by a Board of Director
Decision made by resolutions at a board meeting or unanimous written consent

Question 2

Define Sole Proprietorship (6)

Answer 2

Not a separate entity
Business disregarded for tax purposes
pass through income to SP’s 1040 SchC
SP gets deduction for expenses
SP pays tax on business net income
SP pays both employer & employee SS tax/FICA

Question 3

Define Partnership

Answer 3

unincorporated business owned by >1 individual

Question 4

Define General Partnership (6)

Answer 4

Partners are equally liable for the partnership’s debts
Any partner can take action OBO the Partnership without consulting the other partners
Withdrawal/death of a partner dissolves the partnership
GP is a pass through entity
Partnership files Form 1065 which is informational only
Partner’s share of the profit/losses & employee contributions are reported on Sch K-1 which then flows through to the partner’s 1040

Question 5

Define Limited Partnership

Answer 5

1. Limited partner
   a) Liability is limited to investment/equity in the partnership
   b) Not involved in the daily operations of the business
   c) No earned income, only passive income
2. The Limited Partnership may have a General partner who:
   a) will have earned income reported on a Sch K-1.
   b) can participate in the Partnership’s retirement plan.

Question 6

Define/Describe Limited Liability Partnership (LLP)

Answer 6

1. Must be for profit, can’t be a non-profit
2. Must register with the state
3. Subject to dissolution upon the death of a partner
4. Partner are equally liable for managing the business, debts & contracts
5. Partners share in losses and income equally
6. Can elect to be taxed as a corporation
7. otherwise if taxed as a partnership, the partners income for retirement plan purposes will be earned income

Question 7

Define/Describe Limited Liability Company (LLC)

Answer 7

1. Contractual arrangement among members that allows member’s the freedom to determine management structure
2. LLC can be run by members or managers appointed by the members
3. LLC can elect to be taxed as:
   a corp
   a partnership if 2 or more members
   a sole proprietorship if only 1 member

Question 8

Define or describe an s-corp.

Answer 8

S-corp=Corporation that elects to be taxed as a partnership

Question 9

What conditions must be met to be an S Corp

Answer 9

Conditions:
no more than 100 Partners
one type of stock
no non resident alien partners
no entity/ trust partners

Question 10

S Corp: What type of income do the shareholders receive

Answer 10

Shareholder eees get W-2 and allocation of net profit reported on K-1
Partners contribution and partners share of employees’ contributins is reported on K-1, his contributions are not reported on 1040

Question 11

What is the Self Employed Income/ Earned income formula

Answer 11

Schedule C or K-1 income
minus 1/2 self employment tax
minus partner/member/Sole proprietor’s share of contributions made OBO common law employees
minus employer contribution for the partner/member/Sole proprietor

Question 12

How do you solve for Net Earned income that would allow for contribution rate X%

Answer 12

X = desired employer contribution rate
I = gross Schedule C/K-1 income
C = Contributions for non-owner employees
SE = SE tax

Net earned income = ( I - C- 0.5SE)/(1+X)

Question 13

QSLOB Define/Describe (7)

Answer 13

1. QSLOBS are formally organized into separate business units with separate bookkeeping
2. Separate management
3. File Form 5310-A with the IRS
4. Pass 1 administrative scrutiny test
5. At least 50 employees on every day of the year
6. At least 80% of top paid employees are substantial service
7. At least 90% of employees provide service for that LOB

Question 14

QSLOB can (but are not required to) test separately for:

Answer 14

coverage
non-discrimination

A plan must satisfy the nondiscriminatory classification test on an empl

Question 15

Administrative Scrutiny tests

Answer 15

1. Safe Harbor: The ratio: %HCEs in QSLOB/%HCEs company wide, is more than 50% but less than 200%
2. Different industries
3. Different Industry Segments
4. Avg Benefits:
   If failed safe harbor due to <50%; then QSLOB NHCE Avg benefit must be > Company wide NHCE Avg benefit
   If failed safe harbor due to >200; then Avg benefit for QSLOB HCES must be <Company wide HCE Avg benefit
5. Max/Min Benefits Test
   If failed safe harbor due to <50%; then 80% of NHCE must receive min benefit in the regs
   If failed safe harbor due to >200%; then HCEs benefit must be less than max in the regs