Retirement plans of inside directors.
Author | Schooley, Rita L. |
Qualified retirement plans are one of the last great tax shelters still available. They provide a tax deduction for contributions, tax-deferred income and often, tax-favored payouts. As a result, when high-income individuals have an opportunity to shelter income in a qualified plan, they often take it. The price to be paid for the major tax benefits available is complex regulation and nondiscrimination rules that generally make it difficult to exclude rank-and-file employees of the same employer.
The cost of covering rank-and-file employees is often a deterrent to setting up such plans. The general nondiscrimination rules are found in Sec. 414(b), (c) and (m). Generally speaking, corporate employers that are members of a controlled group, entities under common control that are not all corporations, affiliated service groups and management companies are aggregated under these rules. Entities under common control, generally speaking, are those with more than 50% common ownership.
Because of the creativity of taxpayers, Congress enacted Sec. 414(o) as a general anti-abuse provision. This section gives the IRS broad authority to prescribe regulations to combat other structures designed to avoid the nondiscrimination rules. Under that section, the Service has issued regulations covering inside directors and leased owners.
Prop. Regs. Sec. 1.414(o)-1(g) was designed to prevent individuals who are both corporate employees and directors (regardless of whether they owned shares) from setting up separate self-employed qualified plans based on their directors' fee income. These proposed regulations were never finalized and on Apr. 27, 1993, they were withdrawn...
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