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Affiliated Service Group w/ SEP & 401K


ERISA13
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We have a client in an Affiliated Service Group (A-org). The A-org sponsors a SEP IRA that covers the 2 employees of the A-org and the FSO sponsors a traditional 401K (ADP test) that covers the 50 employees of the FSO. Thanks to Derrin Watson's Who's the Employer, I believe I understand correctly that members of an Affiliated Service Group can sponsor different plans with different levels of benefits as long as they can pass covergae testing separately (but must include employees of all ASG members in testing). But how would this work when there is a SEP and 401K? Does a SEP even test coverage or is it just required that any employee of all employers in ASG that meet the SEP's eligibility requirements receive a SEP contribution? Can you aggregate a SEP and 401K for coverage or nondiscrimination testing? If so, how would that work?

I don't work with SEP's or Affiliated Service Group very often so I appreciate any guidance you can give.

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For purposes of 408(k) -- which governs SEPs -- all the members of an affiliated service group are treated as one employer. The problem you may have is that an employer may not sponsor a SEP if it maintains another qualified plan, or if the employer employs more than 25 individuals. Also, IRS audit guidelines for SEPs note that, since a SEP generally is required to cover all employees, a SEP that does not cover an affiliate related to the employer under the IRC 414(m) rules violates 408(k).

Given the variety and the complexity of the failures involved -- you may want to consult with someone being paid to resolve the problem. I am unsure, myself, how best to resolve this problem through EPCRS, as the issue does not fit into a neat Demographic Failure or Ineligible Employer Failure category.

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