Sar Sep ?

[Guest JimJ]

Does family aggregation place any restricitions on a SAR SEP?

Here is the situation...

Father owns a business. His son works for the business and is also self employed. Son participates in the business P/S plan and wants to also start a SAR SEP.

Are there any problems in doing this? Thanks in advance for your help.

JimJ

Note: Question changed to "opening a SEP" rather than a SARSEP. Age of child still unknown. --GSL

[Gary Lesser]

If the child is under the age of 21, then the businesses are related (treated as a single employer). [irc 1563(e)].

The business cd be related under other theories too--part of an affilliated service company under IRC 414(m) if one business performs services for the other.

[Guest JimJ]

Gary,

Thank you for the reply. To simplify does that mean that the son can not open a SAR SEP? The income used to fund the SAR SEP is self employment income and not derived from the company owned by his farther.

JimJ

[Guest JimJ]

Actually the above question should say SEP IRA, not SAR SEP.

JimJ

[Appleby]

The family aggregation rules were repealed for tax years beginning after 1996.

I assume you mean family attribution rule.

The response would be the same for SEP and SARSEPs

[Belgarath]

Isn't the issue moot? I thought that you could no longer open a SAR-SEP?

[Appleby]

You may not establish new SARSEPS, but those in existence before 01/010/97 were grandfathered. New participant may be added to these plans.

[Guest JimJ]

Appleby,

Thanks for the reply, but maybe I missed something. Can the son establish a SEP and fund with self employed income?

[Gary Lesser]

If the child is under the age of 21, then he may have to be included in the P/S plan, unless the plan can qualify without the child. If the child (under age 21) opens a SEP, then employees of the father's business would have to be included in the SEP.

Although the family "aggregation rules" have been repealed, the controlled/related/affiliated group rules are very much alive. IRC 414(B), 414©, and 414(m).

[Guest JimJ]

Gary,

Thank you again for your reply. Maybe I'm over my head on this one. He is covered by the P/S plan and does recieve an annual contribution. I'm not sure of his age and will check, but I believe he is over the age of 21. (for purposes of this discussion assume he is over 21) He receives compensation from both the company owned by his farther and his own company which is not related to his fathers organization. (I will also get more information on this to be sure, but again for purposes of this question assume there is no relation) He would like to open a SEP and fund it based on his compensation received only as a sole prop. Maybe my question does not make much sense, but all the research I have come accross allows an individual to open a SEP as long as he receives compensation as a sole prop. No other employees are employed by his own company, therefore he would only make a contribution for his benefit. I know or at least think that the annual additions limit would apply to the SEP based on his contribution received by the P/S plan. The SEP would be treated as another DC plan for 415 purposes. My question is realy just this... is he eligible to open a SEP under his company and does the fact that he is covered by a P/S plan owned by his fathers company have or place any restricitons on the SEP or his ability to open one. Maybe this is just much more complicated than this question. I appreciate your answers so far. Thanks.....

I will check on the age and will see if the business are related in any way or if one performs services for the other.

JimJ

[Gary Lesser]

If over the age of 21 he can have a SEP based on his EI. He can also participate in the P/S plan. Since they are not otherwise related/controlled/affiliated (because he owns not more than 50% of any other business) there are no 415 issues (other than applied separately to each business's plan(s). In computing the SEP contribution, however, his W-2 income (although not considered for benefits) is taken into account in computing the 1/2 of of the social security tax deduction) offset. Depending upon his income and the amount he wishs to contribute, a SIMPLE-IRA ($7,000 + 100% match up to 3% of compensation) sd also be considered.