We are currently working with a sole proprietor who has a pension plan. He has a domestic employee, and would would like to offer a plan to that employee. If he sets up a separate plan, is this employee going to be considered part of a controlled group?

There are several threads on this issue you may want to read. The basics are running a household is not a business, only employees of a business are eligible for a retirement plan (qualified!), therefore domestics are not eligible for a qualified plan.

We have not had much luck finding this subject in our reference books. Would you be able to tell me where I can find the information stating that running a household is not a business? Thank you very much!

If I recall, its very hard to find information on this topic. My vague recollection is that the only thing that you can set up is a SEP and then you are subject to a 10% excise tax. So it's just best to pay the household employee enough so that he or she can contribute to an IRA. I think that there was something in one of the proposals of the last year that would fix this.

My recollection is that EGTRRA removed the 10% excise tax for non-deductible contributions, but the contributions are still NOT deductible.