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Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Controlled Groups, Common Control and SEPs

(Posted September 4, 2001)

Question 123: Because a SEP is not a qualified plan, can two sole proprietors (X and Y) that are members of a controlled group have two separate SEPs and ignore the controlled group rules?

Answer: No. Of course, two sole proprietorships technically couldn't be a "controlled group" because that applies only to incorporated entities, but they could be a group of trades or businesses under common control pursuant to Code section 414(c), perhaps through the attribution rules.

Either way, the answer is the same. Both IRC 414(b) and 414(c) refer not only to the controlled group rules, but also to the SEP rules and the SIMPLE rules. Thus all employees of both X and Y are deemed to be employed by a single employer for purposes of SEPs, SIMPLEs, and qualified plans. Accordingly, when the SEP rules require that all employees meeting certain requirements be covered, that includes all employees at both proprietorships.

Now, I have a question for you: you knew it was too good to be true, didn't you?

For more information on the effect of controlled group or common control status, see Chapter 10 of my book, Who's the Employer?.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.