SEP IRA rules regarding owner of multiple businesses
I have a client who set up a safe harbor 401k for his dental practice several years ago. He also owns (with a partner) a completely unrelated real estate business and would like to set up a SEP IRA for the real estate business. If he sets up a SEP IRA for his real estate business, will he be required to include employees from his dental practice when determining who is eligible to participate in the SEP IRA? It seems like he would have two strong arguments for excluding employees of his dental practice from the SEP:
1) the industries and businesses are completely unrelated (other than having the same owner).
2) the employees of the dental plan are already covered by a qualified plan (and a safe harbor, at that!).
However, based on the following information from the “SEP IRA Checklist” on the IRS website, it would appear that he is required to consider ALL employees of both companies when determining SEP IRA eligibility.
[quote]Including Employees of Related Employers: “Employees” for purposes of determining who is an eligible employee under your SEP includes all employees of all related employers. Related employers include controlled groups of corporations that include your business, trades or businesses under common control with your business, and affiliated service groups that include your business. This means, for example, that if you and/or your family members own a controlling interest in another business, employees of that other business are “employees” for purposes of determining who is eligible to participate in a SEP.
Example. Individual P owns Business A, a computer rental agency that has 40 eligible employees. Individual P also owns Business B, which repairs computers and has 30 eligible employees. Individual P is the sole owner of both businesses. For purposes of the SEP rules, all 70 employees are treated as employed by a single employer.[/quote]
Any thoughts?
Permalink Submitted by Marvin Rotenberg on Wed, 2010-01-27 19:08
The fact that the two businesses are unrelated doesn’t matter. If the client in question owns a “controlling interest” in the unrelated real estate business, then for purposes of minimum participation and coverage purposes the employees of both businesses must be treated as employed by a single employer. That would be applicable for the safe-harbor 401(k) plan of the dental practice too, not just the proposed SEP of the real estate business. I’ve provided some information on controlled groups of businesses below that might be helpful.
This question is probably best addressed by the firm providing plan administration services for the safe-harbor 401(k) plan.
Check out Code sec. 7701(a)(2)
Marvin
Permalink Submitted by Kyle Bigler on Wed, 2010-01-27 22:27
Marvin,
Thanks for the confirmation. I really appreciate it. One last question based on your comment below:
[quote=”[email protected]“]That would be applicable for the safe-harbor 401(k) plan of the dental practice too, not just the proposed SEP of the real estate business.
Marvin[/quote]
If the only employees of the RE business are also covered by the dental practice 401k (i.e. the owners of the dental practice are also the owners of the real estate business), would they be considered TWICE for the 401k? More specifically, would the 3% safe harbor contribution be calculated by combining the owners salary from the dental practice AND their salary from the R/E business?
Thanks in advance for your help!
Permalink Submitted by BruceM on Thu, 2010-01-28 07:54
What I think you are speaking of are control groups. From Publication 560
[i]You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP.
An affiliated service group described in section 414(m).
A controlled group of corporations described in section 414(b).
Trades or businesses under common control described in section 414(c).[/i]
If there is at least an 80% ownership of two organizations by the same individual, then for purposes of retirement plans and welfare benefits, the IRS considers it the same employer. If a service organization, the test is a little different for establishing a control group or affiliated service group, which tests the working relationship between the ‘First Service Organization’ and an ‘A Organization’.
Take a look at IRC sections 1561 and 414(m)
BruceM