Who's the Employer?

Answer: The five businesses are an affiliated service group, and this seriously affects what they can do.

(In analyzing this situation, I will refer to specific questions from my book, Who's the Employer. Subscribers to the web edition will be able to click and read the relevant discussion.)

Each S corporation owns an interest in the partnership. Each corporation regularly performs services for the partnership. The partnership and each corporation are professional service organizations. All the elements exist for a classic A-Org style affiliated service group. (Q 13:6.)

For almost all purposes, an affiliated service group is treated just as a controlled group is treated. (Q 13:21.) In other words, for most purposes other than deductions, all employees of ASG members are treated as though they are employed by a single employer.

What does that mean for a SEP arrangement? A SEP arrangement must cover all eligible employees of the employer. So, if any of the S corporations establishes a SEP arrangement, then that SEP arrangement must cover all employees of all 5 businesses who satisfy the SEP arrangement's age, service and compensation requirements. (Q 10:28.)

So, can each S corporation sponsor its own SEP arrangement? I guess it could, but each such arrangement would have to cover each eligible employee of all 5 businesses. There are no provisions in the Internal Revenue Code that would allow a SEP arrangement to offset benefits provided under another plan. In practical terms, it makes no sense to go with a SEP arrangement in this situation, unless you wish to set up one for the entire group.

That being the case, it makes absolutely no difference what the partnership does with its 401(k) plan. Regardless of the presence or absence of nonelective contributions to the 401(k) plan, a SEP arrangement must cover all eligible employees.

You might be interested in a presentation I am doing on controlled and affiliated service groups at Corbel's Advanced Pension Conference in Orlando on Feb. 12-14, 2003. I often speak about the rules for controlled groups. At this conference, I'll be discussing the process of analyzing a controlled group situations, so you can use the rules sensibly. At that conference I will also be discussing Rev. Proc. 2002-21, as well as new developments in the 401(k) world.

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