SEP plan increasing length of service

Doctor opens new office as LLC (disregarded entity) January 1, 2017 and brings over some employees from previous practice which was an S Corp. He sets up SEP for new practice with zero length of service so the employees he brought with him will be able to continue having a SEP. On 4/1/17, he changes length of service to 3 years and hires more employees. He has had a SEP for "side" medical service income (no employees) for previous 10 years filed on his personal schedule C.

Of course, I am just now learning about this. I'm getting conflicting information from my sources. One seems to imply that ALL employees would now have to meet the new 3 year length of service, meaning the original employees brought over with him would not be covered for 2017.

Another source implies that it would be discriminatory if any "highly compensated" individuals were not covered by the new length of service requirement. So, all of the original non-highly compensated employees would NOT have to meet the new 3 year requirement. He meets it with prior schedule C income.

Any ideas? Also, he now wants to change to an integrated plan.

First post here, thanks in advance for any help.

This is from IRS FAQ's.

I’d like to establish a SEP plan that allows me to participate immediately. Can I establish different SEP plan eligibility requirements for future employees?

Yes. You can initially establish your SEP plan so that you are immediately eligible to participate in the plan. Later, you can amend the plan to have more restrictive eligibility requirements, but you must also meet the new eligibility requirements to continue your participation in the plan.

https://www.irs.gov/retirement-plans/se ... quirements

If I remember right, if you want to count prior service (same employer rule) you can.

Have you considered the position that the new practice is a continuation of the same trade or business that S corporation was involved in? If the employees, the owner, and the business purpose are all the same, then the shift to a new location and a new entity type would seem to be merely a distinction in form and not in substance.

My impression is that a judge or any other tax authority would look though to the substance and perceive continuity of the underlying activity.

Considering the owner to have accrued length of service under his Schedule C "side" medical services income before the establishment of the LLC and the move to a new location already relies on most of the same assumptions that I have proposed above - the only difference is what activities the continuity is applied to. If other medical services income was only on the "side", perhaps the S corporation activities are a stronger candidate. Alternatively, perhaps there is a position that the new LLC is a continuation of both - a "merger" of sorts.

I just randomly stumbled on this article, which gives some insight into when different entities can be considered part of the same trade or business:

https://www.thetaxadviser.com/issues/20 ... ntity.html

Thanks for the prompt responses.
My "Simple, SEP and SARSEP Answer Book" says prior service with a predecessor employer "probably" won't count towards service for a new plan particularly if there is no provision for it in the plan document (which there isn't). So that nixes the employees counting prior service. I think the doctor is OK because he has been practicing medicine (schedule C, albeit part-time) for over 3 years and he is continuing to practice medicine (schedule C). The main question is the original employees. They were covered by the original plan, no length of service required which started 1/1/17. However, the plan was changed on 4/1/17 to a 3 year waiting period. I can't find anything definitive as to whether the original employees are subject to the 3 year rule same as new employees for the period 4/1/17 onward. The IRS addresses the owner at https://www.irs.gov/retirement-plans/se ... quirements but not the employees.

[...]I can't find anything definitive as to whether the original employees are subject to the 3 year rule same as new employees for the period 4/1/17 onward. The IRS addresses the owner at https://www.irs.gov/retirement-plans/se ... quirements but not the employees.

The source you link to states that "[t]he eligibility provisions stated in the SEP plan document must apply equally to owners and employees". I would read this to mean that anything else on that page applicable to the employer would be equally applicable to all employees and vice versa.

The logic for counting the owner's prior service before the new business entity was established, but not counting the employee's prior service on the grounds that it isn't mentioned in the plan document seems a little shaky to me. All the rules apply equally to the employer as they do to the employee, so in granting the employer prior service you are already taking the position that there is continuity from one business to the next even though it isn't mentioned in the plan document. Once that position is established, I don't see anything holding you back from including service with the prior S corporation except for the "same trade or business" determination.

[...]If I remember right, if you want to count prior service (same employer rule) you can.

Not sure what Doug is referring to here with the same employer rule but it seems important and worth following up on.

He has had side practice for ten years with SEP. wouldn’t the former S Corp employees have been eligible participants of side business retirement plan if doctor owned 100% of both trades or businesses?

He has had side practice for ten years with SEP. wouldn’t the former S Corp employees have been eligible participants of side business retirement plan if doctor owned 100% of both trades or businesses?

Had the same question.