Advanced Underwriting Consultants

Question of the Day – January 9

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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.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day. 

Question of the Day – January 20

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

Question: My client is the 100% owner of a business, and has implemented a Simplified Employee Pension (SEP).  The client has determined that he contributed too much to his own SEP IRA for 2011.  What are the penalties for doing so, and how can he fix the situation?

Answer: Here is a link to an IRS website with information about SEP IRA contributions:  http://www.irs.gov/retirement/article/0,,id=111419,00/#contributions

Here is the specific question and answer regarding withdrawal of over-contributions to a SEP IRA contained on the website:

What are the consequences to employees if excess contributions are made?

If contributions are made in an amount that is more than is allowed, there are tax implications for the employer and the employees. Excess contributions are included in employees’ gross income. If an employee withdraws the excess contribution, and earnings on such amount, before the due date for filing his/her return, including extensions, the employee will avoid a 6% excise tax imposed on excess SEP contributions in an IRA. Excess contributions left in the employee’s SEP-IRA after that time may result in adverse tax consequences to the employer and the employee. If the employer contributes more than it may deduct, it may be subject to a 10% excise tax.

For the business owner in this case, he may withdraw the excess SEP contributions from his IRA, including any earnings on the excess contributions, by the due date for his 2011 return, including extensions.  That will allow the employee to avoid the 6% excess contribution excise tax.

The returned contributions will be taxed as extra compensation the employee/owner.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – January 5

Ask the Experts!

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

Question: My client has a simplified employee pension (SEP) plan in place at his 100% owned company.  May the client also implement a defined benefit plan?

Answer: Probably not.

Most employers implement a SEP using IRS Model Form 5305-SEP.  That form specifically disallows the use of any other plan if the 5305-SEP is being used for the SEP.

A prototype or individually designed plan document is required if the employer wishes to combine a SEP with any other qualified plan other than another SEP.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.