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SEP IRA -- Two Spouses


Sydney

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I am hoping someone can assist with this.  

I am married and have a restaurant, and I do have a few full time employees.  My husband is also self-employed but his business does not have any employees.  I have been told that he cannot have his own 401(k) as we are married and my employees would need to be covered under his plan since we are married. 

Could he establish his own SEP IRA for his own business without me having to include my restaurant employees as part of his SEP?

While I am at it, is there any way I could have a SEP without having to cover my employees.  The restaurant business is so hit and miss as it relates to employees...ugh.  But, do I even have any options as to what I can do?  I am assuming I can always do a regular IRA, but would like to try to do something more.  But, if my husband could at least have a SEP (or 401(k)...but I don't think it is possible unless my employees are covered).

Any and all comments are appreciated.  Thanks.

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Sorry, but you are going to be subject to the interaction of attribution and controlled group rules. I'll let the expert give you the details.

However, I would think in the restaurant business you can exclude a significant percentage of your employees. Only eligible employees can participate and receive employer contributions.

Employee eligibility requirements are:

  • Are >= age 21
  • Have worked for the business in at least 3 out of the past 5 years
  • Last time I checked they also needed >= $600 in compensation.
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Spirit, thank you so much for you reply.  Would it be better to just set up a 401(k) since it is my understanding that we could have more restrictive (don't know if that is the right word) participation requirements?  For example, I think we can have age 21,but working more than 1,000 hours per year and no participation until at least two years of full time employment?

With the SEP, here is where I am confused, does there have to be 5 years?  For example, I would assume if the restaurant has only been in business for 2 years, I would still need to cover employees even though they have not worked 3 years?

Thanks.

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The SEP IRA three and five years refer to the employee's employment not the the business. 

The  401k 1,000 hour limit is for determining of years of service, there is no full-time restriction.

You should consult with a professional to determine with your employee's ages, work schedules and tenure/turnover what is the most appropriate plan. Also, the two types of plans and choices therein can have very different administrative costs, employee contribution costs and possible employer contribution amounts based on any given employer contributions.

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Plans, whether they be 401(k)'s or SEP's, for restaurants are fraught with administrative issues and very, very, very difficult to get right.

In a perfect world you would be able to prove whoever told you that your employees would need to be covered under a plan for your husband is wrong. Then, at the least, he could set up a plan for himself and leave the restaurant out of it.  But they are probably right, because you have to satisfy quite a few requirements to be able to scissor the two businesses and, most likely you will fail one or more.  Briefly:

1) You don't live in a community property state

2) He doesn't help at the restaurant (either as an employee or otherwise) and you don't help him in his business (either as an employee or otherwise)

3) His business doesn't generate more than 1/2 of it's gross revenues from passive investments (this one is not generally a concern)

4) Your husband is free to sell his business to an unrelated person without your approval or the approval of a third party acting on behalf of a minor child.

It's a longshot, but if you do satisfy all those rules then the advice you have been given is wrong and, by far, the easiest thing for him to do would be to establish a 401(k) for himself and forget about the restaurant.

If the advice is correct then the best thing to do, as already indicated by spiritrider is to gather up all the information you have and get a pension professional to look at it for you.  What you want is to list, by calendar year, every employee with date of birth, date of hire, hours worked during the year and compensation paid to them during the year.  You need to do this for EVERYBODY, no matter how few hours they work in any given year.  You need to do this for at least five years prior to the first year you want to establish a plan for.  If you are thinking about 2016 (for a SEP, assuming your 2016 personal tax return is still on extension) that means from 2011 through 2016.  If you are thinking about 2017 (which would be required for a 401(k), but could also apply to a SEP) that means from 2012 through 2017. Then you need to provide copies of both you and your husband's IRS Forms 1040-Schedule SE for all years in question.  To the extent you are including 2017 in your deliberations you have to guess at some of this information, but guess you must, because nobody is better positioned to do so than you are.

A word of caution: many restaurant owners chafe at properly reporting compensation for those employees who receive tips.  The rules are complex.  Before you involve a pension professional you need to check with a CPA to ensure that you understand how to accurately report compensation for those employees who receive tips.

If you can put all that information together a pension professional should be able to tell you what your options are with very little effort. And if somebody says they can give you thorough advice without seeing all of the information I've mentioned, ask for a reason that the information isn't necessary.

Good luck. 

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I believe you also have to have no minor children with your husband, in addition to what Mike listed above.  If the child is deemed to own both the businesses through the family attribution rules, then that also removes the potential exemption to the usual controlled group rules, as well.

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