Advanced Underwriting Consultants

Question of the Day – January 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  I have a client who operates multiple business entities, all of which are solely owned by him.  Each business has its own employees.  He has a single member LLC, where the client’s son is the only employee.  May the client implement a SEP for his son’s benefit at the LLC without having to include employees from the other entities?

Answer:  No.

Code Section 414 provides that all employees of businesses or trades, whether or not incorporated, under common control shall be treated as employed by a single employer for retirement plan purposes.  The intent of Code section 414 is to make it impossible for the pension plan coverage and discrimination rules to be avoided merely by operating a business as a separate corporation, LLC, partnership, or proprietorship, rather than a single entity.

There are three categories of common controlled groups: brother-sister, parent-subsidiary, and combined groups.

A brother-sister controlled group is two or more businesses in which five or fewer person (a “person” may be an individual, trust or estate) possess ownership interests which are: (a) 80% or more of the ownership of each business, and (b) more than 50% of the ownership of each business taking into account each owner’s identical ownership in each business.

The facts described in the question indicate that the client is subject to the brother-sister controlled group rules.  Therefore, eligible employees from all the businesses solely owned by the clients would need to be included in a qualified plan implemented at any one of the businesses.

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