Sole Proprietor Incorporates--SEP Eligibility Question

[KJohnson]

A sole proprietor with a few employees incorporates. I had always figured that the proper course is for the incorporated employer to fill out a new 5305 and just count the "predecessor service" with the sole proprietorship for future eligiblity for the SEP.

I then turned to the Code an realized that 414(B), 414©, 414(m) and 414(n)—controlled groups, common control, affiliated service groups and leased employees- all reference 408(k) and apply to SEPs. However, the provisions of 414(a) with regard to successor employers and crediting service with the predecessor only references “plans” and not 408(k).

I can’t imagine that the intent was to “freeze” out everyone and make them requalify for eligibility simply because the sole propietorship incorporates. Has anyone else dealt with this issue?

[Gary Lesser]

It is an interesting issue that has never received much attention; until now.

Section 414 does apply to SEPs. If the corporation existed at any time during the SEP year, then they are controlled entities and all service with either entity counts for everyone. If not, then it would depend upon whether the plan of the SE is adopted by the Corp (service counted) or whether it is a new plan (must wait for regulations to be issued - we've been waiting now for almost 30 years). As a new plan you would have to use "zero" eligibility so that the plan has participants for the first year.