CAn some who owns two companies participate in multiple plans (SEP IRA & SIMPLE IRA)

Submitted by Audra Higgins on Mon, 2019-05-06 18:20

Client has a single member LLC for a bookkeeping business, and is actively contributing to her SIMPLE IRA for this business
Client has now opened an S-Corp for a similar accounting services and has one partner/employee in the new company and a 1099 employee- she now wants to open a SEP IRA for this company.

Is she personally limited to do this in 2019 and participate in the SEP IRA seeing as she is the owner/employer of the LLC an participating in the SIMPLE IRA?



Submitted by William Tuttle on Mon, 2019-05-06 18:51

  • A SIMPLE IRA is usually the least useful choice for an owner-only business.
  • Which is it, a partner?, an employee? or both? If there is a partner, what are the relative ownership interests? If there is an employee, how many hours do yhey work/year?
  • Are the two businesses providing services to each other or any of the same clients?
  •  The two businesses could be a controlled group, an affiliated service group or neither depending on the facts and circumstances
  • If they are controlled or affilated service group, the two businesses would be treated as one business for retirement plan purposes and could not have a SIMPLE IRA and another retirement plan.

Submitted by Audra Higgins on Mon, 2019-05-06 20:42

Both the LLC and S corp service same industry with possible overlap of clientele.  Mother owns LLC as a single member.  Scorp owned by mother and daughter mother with larger equity stake.  They are the only W2 employees.  Therefore I am gathering that from the above information, they could not proceed to open a SEP in 2019 while the mother is still actively contributing to the prior SIMPLE IRA.  If that SIMPLE ends on 12/31/19.  Then then S corp could begin a SEP for both owners come 2020, correct? If so, could the daughter atleast take advantage of participating in the SIMPLE for this year as the companies may be seen as “on in the same”?

Submitted by William Tuttle on Mon, 2019-05-06 22:59

  • Since the partners are mother and daughter and the mother owns > 50%, this is a controlled group due to family attribution rules. Even if this wans’t true this might be an affiliated service group because of overlap of clients, subject to the actual revenue from common third parties.
  • I am not certain, but I think you should amend the SIMPLE IRA plan, by including both employers in the “name of the employer” box on the top of the form. Not only can your daughter take advantage of the SIMPLE IRA, but this was a plan error by not doing so.
  • Your daughter was actually eligible to participate effective on her “hire date”. The S-Corp must take corrective actions to make up for its failure to allow her to make employee deferrals.
  • Refer to the IRS SIMPLE IRA Plan Fix-It Guide. The required correction is for the S-Corp to make up for 50% of her lost deferral opportunity and 100% of the lost employer match. The S-Corp must make a contribution on her behalf of 1.5% of compensation and make a employer contribution of 3% of compensation. You will also have to make up for lost earnings on both.
  • I don’t know how those lost earnings are calculated, by maybe Alan will respond and give the correct answer.
  • Yes, you can change employer retirement plans effective 1/1/2020. Make sure you send a notice to you and your daughter by 11/2 that the SIMPLE IRA plan is terminating effective 12/31/2019. Remember, neither you or your daughter can rollover any SIMPLE IRA balances to anywhere other than another SIMPLE IRA for two (2) years after the first contribution.
  • Finally, it would be far better for you to adopt a one-participant 401k plan for the controlled group of companies and 401k accounts for you and your daughter. You (through you LLC assuming sole proprietor) and your and your daughter can then elect employee elective contributions (deducted from 2% shareholder-employee wages, but deposited by the S-Corp) up to 100% of compensation not to exceed the limit (2019 = $19K + $6K catch-up contribution if >= age 50). In addition you/S-Corp can make the same employer contribution of up to 25% of compensatiom with the combined employee + employer contributions not to exceed the annual addition limit (2019 = $56K + $6K catch-up contribution if >= age 50).
  • Hopefully Alan and/or DMX will verify/correct what I have commented on here, there are a lot of moving parts.

Submitted by David Mertz on Tue, 2019-05-07 01:30

  • I agree, attribution rules and ownership structure make the two businesses a controlled group which must be treated as a single employer with respect to the companies’ retirement plan.
  • The daughter will be an eligible employee with respect to the SIMPLE IRA plan if she meets the compensation requirements established in Article I of the SIMPLE IRA plan (Form 5304-SIMPLE or 5305-SIMPLE).  Here’s the link to the SIMPLE IRA Plan Fix-It Guide:  https://www.irs.gov/retirement-plans/simple-ira-plan-fix-it-guide
  • I believe that a one-participant 401(k) plan can only have spouses as participants, so a 401(k) plan with mother and daughter as participants would have to be a regular, perhaps safe-harbor, 401(k) plan:  https://www.irs.gov/retirement-plans/one-participant-401k-plans

Submitted by William Tuttle on Tue, 2019-05-07 12:56

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