SEP for S-Corp Partner in Partnership

Submitted by John Going on Tue, 2022-02-22 18:04

LLC (partnership) has three partners, each of which is an S-corp. The question I am being asked is if the partnership can make SEP contributions to an S Corp partner? My initial answer is no since The S-Corp is an entity and not an individual. is my logic correct?



Submitted by William Tuttle on Tue, 2022-02-22 21:04

The partnership and the three partners are an AFS.
The tax code and the IRS consider them one employer for employer retirement plan purposes.
The partnership can adopt a single SEP IRA plan. However, because the S-Corp’s 2% shareholder-employees are not employees of the partnership. The S-Corp’s actually make the contributions based their employee’s compensation as an affiliated employer.
If the partnership has no employees, the three S-Corps can each adopt their own SEP IRA and make contributions there.
However, if the partnership has employees, the partnership should adopt the SEP IRA and ensure the S-Corp’s 2% shareholder employees receive the exact same SEP IRA employer contribution percentage as partnership employees.

Submitted by John Going on Tue, 2022-02-22 21:44

Spiritrider – As usual, your answer is very helpful.  The partnership does have an employee.  If I am understanding your last bullet point correctly, the Partnership adopts the SEP-IRA and makes SEP contributions using the same percentage for the employee and the partners.  Since the partners of the Partnership are S-Corps, the contributions actually go to the shareholders of the S-Corp.  Am I understanding you correctly? If so, the partnership is paying Guaranteed Payments to the individual S-Corps and the S-Corps are paying wages to the S-Corp shareholder-employees.  When multiplying the SEP percentage against compensation, do I use the Guaranteed payment amount paid by the partnership to the individual S-Corp shareholder-employees, or do I use the wage paid by the individual S-corp to the shareholder-employee?  I believe the latter, but want to confirm. Thanks again for your helpful reply!

Submitted by William Tuttle on Tue, 2022-02-22 22:36

The partnership adopts the SEP IRA plan.
The S-Corps receive no compensation with which the partnership can make employer contributions.
The S-Corp’s make the employer contributions to the partnership’s SEP IRA plan based on the 2% shareholder-employee’s compensation and the partnership’s employer contribution rate.
The S-Corp’s 2% shareholder-employee’s compensation is determined by the S-Corp and the SEP IRA plan’s definition of compensation which can include wages, healthcare insurance premiums, HSA contributions and other taxable fringe benefits.
The S-Corps can make employer contributions for their employees directly to the partnership’s SEP IRA plan because they are affiliated employers.
The partnership makes the partnership’s employee’s employer contributions based on the SEP IRA plan”s definition of compensation which does not include pre-tax health & welfare benefits.
The partnership must ensure that the S-Corp’s employer contribution rate for their 2% shareholder-employees does not exceed the employer contribution rate of the partnership’s employees.
While this is a single SEP IRA plan, each partnership and S-Corp employee opens there own SEP IRA account at the custodian of their choice.
This is very complicated, but ultimately the partnership is liable for all SEP IRA plan compliance of all affiliated employers.
Remember, the partnership and the S-Corps are all considered one employer for employer retirement plan purposes and the partnership is responsible for ensuring the partnership’s non-HCE employees are not discriminated against by the S-Corps.

Submitted by John Going on Wed, 2022-02-23 00:36

Spiritrider – Thank you for taking the time.  I suspect you are very busy and appreciate that you would not only answer the question but give the level of detail you shared.  All the best –

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