Question 144: Dr. V owns 100% of a P.A. (VPA) and is its sole employee. VPA pays Dr. V a salary and also makes a contribution to a SEP for her. All of VPA's services are performed for another medical corporation (SPA). There's no affiliated service group here because VPA does not have an ownership interest in SPA. However, if Dr. V personally purchases a 10% interest in SPA, would that create an affiliated service group between VPA and SPA because of attribution from Dr. V to VPA? Would VPA then have to make a SEP contribution for all eligible SPA employees?
Answer: Yes to both questions.

Affiliated service group attribution is based on the IRC 318 attribution rules, the same rules used to determine HCE and key employee status. One of the features that makes the IRC 318 attribution system unique is that it allows for attribution to entities. While all the various attribution systems provide for attribution from entities, IRC 318 is the only system that says that a corporation, partnership, or trust is deemed to own stock held by its shareholders, partners, or beneficiaries under the appropriate circumstances.

A C corporation is deemed to own stock held by any shareholder who has at least 50% of the stock of that corporation. An S corporation is deemed to own stock held by any of its shareholders. A partnership is deemed to own stock held by any of its partners. (For examples, see Q&A 133 and Q&A 134.)

So, if Dr. V buys 1 share of SPA, then VPA will be deemed to own that 1 share. That means VPA will be an owner or shareholder in SPA and will regularly perform services for SPA, and both entities are professional service corporations. This would be a classic A-Org type affiliated service group.

SEP plans are required to cover all employees who meet the eligibility requirements. In determining who those employees are, all employees of any entity included in an affiliated service group are deemed to be employed by a single employer. Accordingly, if Dr. V buys, receives as a gift, or has an option to purchase any stock in SPA, an ASG will exist and SPA employees will automatically be covered under the SEP. The same would be true if Dr. V's husband, children, grandchildren, or parents acquire an interest in SPA.

The IRC 318 attribution rules are discussed at length in Chapter 14 of my book, Who's the Employer?.

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