Category: Compensation & Employee Benefits
Subject: SEP Contributions
Title: SEP Contribution Limits when Spouses are Employed in Same Business
IRC Sections: 402(h)(2), 415(c), and 404(h); 414(q)(6)
Filename: 1206.html
Date Produced: 02/95

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Facts
Husband and Wife (H & W) are the sole owners of a C corporation (C). H & W are also employed by C and each draws an annual salary of $116,200. C has a regular SEP in place.

Issue
Must the salaries of H & W be combined for purposes of determining the maximum contribution to the SEP? In essence, do H & W count as one employee instead of two for purposes of contribution limits?

Answer
H & W need not be aggregated, i.e., treated as one employee. But see the Cautionary Note below.

Discussion
The amount deductible by an employer for SEP contributions and the amount excludible from income by an employee with respect to an employer's SEP contributions are controlled by Sections 402(h)(2), 415(c), and 404(h). There is no aggregation rule directly embodied in these provisions.

An aggregation rule does exist in the law concerning qualified retirement plans. That rule is found at Section 414(q)(6) and basically provides that a husband and wife (as well as certain other members of an employee's family) are treated as one employee for purposes of any rule dealing with so-called "highly compensated employees" which derives its definition thereof from Section 414(q).

Subject to the Cautionary Note set forth below, none of the contribution provisions reference the definition of highly compensated employee in any manner relevant to this issue.

Cautionary Note
As stated above, none of the provisions relevant to deductibility or excludibility provide special contribution limitation rules for highly compensated employees. However, the maximum contribution limit under Section 415(c) is reduced by the amount of "permitted disparity" taken into account with respect to highly compensated employees. Section 402(h)(2)(B). If (and only if) the plan in question in integrated with social security, it may be the case that the permitted disparity rules represent an indirect means of applying the Section 414(q)(6) aggregation rules to your plan.

In general, total contributions or benefits received by each participant through a combination of plan benefits and employer social security contributions should represent a uniform percentage of each participant's compensation. The permitted disparity rules allow certain departures from that uniformity standard to be disregarded for purposes of determining whether the plan discriminates in favor of highly compensated employees.

The rules are extremely technical, and it may be the case that integration issue is inapplicable to a SEP in the first instance. I am raising this issue simply to cause you to determine whether your client's plan is integrated. If not, no further work is needed. If so, then this issue must be pursued.

As an additional cautionary note, I would urge you to review the language of the plan document to determine whether there is any reference to employee aggregation or words to that effect. While it seems clear that absent the integration concern set forth above, there is no requirement to aggregate certain employees for tax purposes, absence of such language from the plan document would provide an additional comfort level.