Can a sole propritor with 2 separate schedule C businesses have a SEP

[Guest Chris Compton]

I have a client who has two separate and unrelated businesses. Each files a Schedule C. The client would like to have a SEP plan for each business, and make contributions to each separate plan. Can he do this?

To further complicate, last year the client made a single contribution to one SEP plan based on both businesses income. Can he now separate the two, or must he aggregate the businesses?

Thanks for any input.

[Gary Lesser]

Yes, but it is probably wiser to have one SEP adopted by both entities. Both plans must be identical in every respect, since all employees are treated as employed by the self-employed individual (for all puposes). Thus, very little is accomplished by having more than one SEP. Also, annual reporting rules are likely to be changed. One plan, one filing; two plans; two filings. Gains and losses from the two businesses are netted, and the owner's EI is the same (either way). One business could not have a SASEP and the other e/er only funded SEP. If there were a separate SEP and SARSEP (for both businesses) and eligibility differed, the top-heavy rules would apply to both plans (even if one weren't top-heavy).

[Guest Taxwoman]

Gary,

I assume your response is based on the controlled group rules?

If so, what if the employer if able to establish a SLOB? Would he/she be then able to treat the plans as two separate plans and maximize contributions in both?

[actuarysmith]

Gary- I think that your answer implied, but did not explicity state one overall deduction limit. In other words, the 404 deduction would have to be based upon the two plans being aggregated.

The only exception to this would be to qualify both businesses as QSLOB's.

There are many different tests on this issue- however, to even start down that road I belive that each of the seperate businesses would have to have a minimum of 50 ee's each (if memory serves - which it sometimes doesn't )

[Gary Lesser]

I guess it's a possibility, but the facts didn't indicate such. I imagine that a SEP would have to be individually designed and there aren't too many of those. My mind is going too, that's why I put everything in print. To be a QSLOB -- From RP 93-42 which was modified by RP 95-34 --

(1) meets the criteria for a line of business for the testing year under section 1.414®-2 of the regulations and for a separate line of business for the testing year under section 1.414®-3 of the regulations;

(2) meets the 50 employee requirement of section 414®(2)(A) of the Code on each day of the testing year;

(3) does not satisfy any of the administrative scrutiny safe harbors of section 1.414®-5(B) through (g) of the regulations; and

(4) satisfies at least one of the following standard access alternatives:

(a) The highly compensated employee percentage ratio of the separate line of business for the testing year, as determined under section 1.414®-5(B) of the regulations, is at least 40 percent and not more than 250 percent;

(B) Ninety percent of the gross revenues of the separate line of business result from the provision of property or services that fall exclusively within one or more industry categories established by the Service (through Rev. Proc. 91- 64), under section 1.414®-5© of the regulations, and no more than ten percent of the gross revenues of any of the employer's other separate lines of business result from property or services provided to customers of the employer that fall within the same industry category or categories;

© The employer is not required to file Form 10-K or 20-F, but there is a certification from an independent certified public accountant that the employer would have been required to report the separate line of business as one or more reportable industry segments on either the Form 10-K or the Form 20-F if the employer had been required to file the applicable SEC report for the employer's fiscal year ending in the testing year, and the separate line of business therefore would have satisfied the administrative scrutiny safe harbor in section 1.414®-5(e) of the regulations;

(d) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414®-5(B) of the regulations, of less than 40 percent, and either --

(i) The separate line of business would satisfy the average benefits safe harbor of section 1.414®- 5(f)(2)(ii) of the regulations if the actual benefit percentage of the nonhighly compensated employees of the other separate lines of business were reduced by one-third, or

(ii) The separate line of business would satisfy the minimum benefit safe harbor of section 1.414®- 5(g) of the regulations if the minimum benefit were reduced by one-third;

(e) The separate line of business has a highly compensated employee percentage ratio, as determined under section 1.414®-5(B) of the regulations, of more than 250 percent, and either --

(i) The separate line of business would satisfy the average benefits safe harbor of section 1.414®- 5(f)(3)(ii) of the regulations if the actual benefit percentage of the highly compensated employees of the other separate lines of business were increased by one-third, or

(ii) The separate line of business would satisfy the maximum benefit safe harbor of section 1.414®- 5(g) of the regulations if the maximum benefit were increased by one-third; or

(f) The separate line of business manages a government facility pursuant to a government contract that specifies the benefits to be provided under a qualified plan.

.04 A separate line of business is described in this subsection .04 if it meets paragraphs (1) through (3) of subsection .03, but fails to satisfy any of the standard access alternatives of paragraph (4) of subsection .03.

The Service will issue a determination that a separate line of business meets the requirement of administrative scrutiny only when such a determination is consistent with the purpose of section 414® of the Code, taking into account the nondiscrimination requirements of sections 401(a)(4) and 410(B).

.03 For a separate line of business described in section 3.03, the Service will take into account the factors enumerated in section 5 below and any other relevant facts and circumstances in determining whether such separate line of business satisfies administrative scrutiny.

.04 For a separate line of business described in section 3.04, the Service will scrutinize all the relevant facts and circumstances, including the factors enumerated in section 5 below, more closely in determining whether a separate line of business satisfies administrative scrutiny. It is anticipated that in these cases the Service will determine that the separate line of business satisfies administrative scrutiny only in exceptional circumstances. Thus, an additional burden rests on the employer to demonstrate to the Service that relevant facts and circumstances unique to the employer support a determination that the separate line of business meets administrative scrutiny, despite its failure to satisfy any of the standard access alternatives of section 3.03(4)(a) through (f).

SEC. 5. FACTORS TAKEN INTO ACCOUNT

In accordance with section 4.03 and 4.04, in determining whether a separate line of business satisfies the requirement of administrative scrutiny, the Service will take into account all the facts and circumstances that it deems relevant, including, but not limited to, the factors listed below. No one factor is necessarily determinative.

(1) Differences in property or services: The degree to which the property or services provided by the separate line of business differ from the property or services provided by the employer's other separate lines of business.

(2) Separateness of organization and operation: The degree to which the separate line of business is organized and operated separately from the remainder of the employer, including the degree of vertical integration of the separate line of business with any other separate line of business of the employer and the degree to which the separate line of business has its own tangible assets.

(3) Nature of business competition: The nature of the business competition faced by the separate line of business, the degree to which competitors of the separate line of business are organized as independent stand-alone companies that do not engage in other separate lines of business, and the type and level of benefits provided by competitors of the separate line of business to their employees.

(4) Historical factors: Whether the separate line of business was acquired from another employer, whether it developed separately within the employer, and whether it was operated separately before the enactment of TRA '86.

(5) Geographic factors: The degree to which the separate line of business is operated in a distinct geographic area from the employer's other separate lines of business, and the impact geographic factors have on the employer's compensation and benefit policies.

(6) Safe harbors: The degree to which the separate line of business fails to satisfy the safe harbors of section 1.414®-5 of the regulations, in particular, the average benefits and minimum or maximum benefits safe harbors of sections 1.414®- 5(f) and (g).

(7) Size and Composition: The size and composition of the separate line of business relative to each of the employer's other separate lines of business. This factor includes the number of employees, both highly compensated and nonhighly compensated, and the highly compensated employee percentage ratio (as determined under section 1.414®-5(B) of the regulations), in each of the employer's separate lines of business (whether or not a separate line of business for which an administrative scrutiny determination is being requested) as determined for purposes of section 1.414®-7 of the regulations.

(8) Allocation method: Which allocation method for residual shared employees the employer applies under section 1.414®- 7© of the regulations, and the impact the allocation method will have on the number of employees who are treated as employees of each of the employer's separate lines of business.

(9) Benefits provided by separate lines of business: The relative level of benefits provided by each of the employer's separate lines of business and the percentage of employees benefiting in each of the employer's separate lines of business.

(10) Other separate lines of business: The degree to which the employer's other separate lines of business satisfy the requirements of a qualified separate line of business for the testing year under section 1.414®-1(B)(2) of the regulations.

(11) Regulated industries: Whether the separate line of business operates in a regulated industry (i.e., whether the separate line of business furnishes or sells electrical energy, water or sewage disposal services; gas or steam through a local distribution system; telephone service or other communication services; or transportation of gas or steam by pipeline) if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof.

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