SEP Holding Company Rules: Controlled and Affiliated Service Groups

If you own a holding company with one or more operating subsidiaries, the SEP plan rules for holding companies start from a single principle: the IRS treats every entity you control as one employer. That means a SEP adopted anywhere in the group has to cover every eligible employee across the group, at the same contribution percentage, up to a per-person cap of $72,000 for 2026.¹ Missing that is the single most expensive mistake a holding company can make with a SEP.

Why the Group Counts as One Employer

Each entity in a holding company structure has its own EIN and its own payroll, so it feels like each one could sponsor its own retirement plan. Under Internal Revenue Code Section 414, entities connected by common ownership or operational ties are aggregated and treated as a single employer for SEP eligibility, contributions, and nondiscrimination testing.²

In practice, that means the parent cannot adopt a SEP that quietly covers only the parent’s staff. Every eligible worker at every aggregated subsidiary is in the plan, whether the owner intended that or not. Fund a SEP only for one entity and the IRS can require retroactive corrections, makeup contributions with an earnings adjustment, and in serious cases plan disqualification.

When Entities Get Aggregated

Two sets of rules pull entities together. Controlled group rules under Section 1563 look at ownership percentages. Affiliated service group rules under Section 414(m) look at service relationships when ownership alone isn’t enough.

Parent-Subsidiary Controlled Group

The typical holding company case. A parent-subsidiary controlled group exists when one entity owns at least 80% of the total voting power or 80% of the total value of another entity’s stock.³ The chain extends downward: if that subsidiary itself owns 80% of another company, that company is in the group too.

Brother-Sister Controlled Group

This one covers separate companies owned by the same small group of people. It exists when five or fewer individuals, estates, or trusts own at least 80% of each company and have more than 50% identical ownership across them. Identical ownership is where owners get tripped up: for each owner, you count only the smallest percentage they hold across the companies. An owner holding 60% of Company A and 40% of Company B contributes 40% to the identical-ownership calculation.³

Combined Group

A combined group exists when three or more entities are connected through both a parent-subsidiary link and a brother-sister link. It shows up in structures where the parent owns some subsidiaries outright and shares ownership of others with the same small ownership circle.

Affiliated Service Group

Even when ownership stays below 80%, the affiliated service group rules under Section 414(m) can still aggregate entities. These target service businesses such as healthcare, law, accounting, engineering, consulting, and architecture, where owners often split operations across separate entities. An ASG forms when a “first service organization” is linked to an A-organization (an owner-entity that regularly performs services with or for the FSO) or a B-organization (an entity doing a significant portion of its work for the FSO, in work historically done by employees in that field, with at least 10% ownership held by highly compensated employees of the FSO or A-organization).² The rule exists to stop owners from moving employees into separate entities to keep them out of a retirement plan.

Family Attribution Can Create a Group You Didn’t See

Ownership isn’t limited to shares you personally hold. Under Section 318, stock owned by your spouse, children, grandchildren, and parents is attributed to you as if you owned it directly.⁴

This is where holding company owners get caught most often. A husband who owns 100% of Company A and a wife who owns 100% of Company B are a brother-sister controlled group under attribution, even if neither has any involvement in the other’s business. The same result follows for a parent and adult child who each own separate companies. Attributed shares count toward both the 80% and 50% thresholds.

One limit worth knowing: attribution doesn’t chain. Stock attributed from you to your spouse can’t be re-attributed from your spouse to someone else. The direct family circle is still wide enough to sweep in most holding company arrangements.

Who Has to Be Covered

Once aggregation applies, SEP eligibility runs across every entity in the group. An employee is eligible if they are at least 21 years old, worked for any entity in the group during at least three of the last five years, and received at least $750 in compensation for the current year (subject to cost-of-living adjustments).⁵

Any part of a year counts as a year of service. An employee who worked one week in January has a year of service for that calendar year. And because the group is one employer, service at any entity counts toward the three-of-five test. An employee who spent two years at Subsidiary A, took a year off, and later joined Subsidiary B meets the threshold.

Leased employees can also count. If any entity in the group uses staffing-agency workers for an extended period, those workers may have to be treated as employees for SEP purposes.⁶

Contributions Have to Be Uniform Across the Group

SEPs are employer-funded. Employees can’t put their own money into a SEP-IRA. The maximum contribution for any individual in 2026 is the lesser of 25% of that person’s compensation or $72,000, and only the first $360,000 of compensation counts in the calculation.¹

The rule that matters most for holding companies: the contribution percentage has to be the same for every eligible employee across every entity. Pick 15%, and an employee earning $80,000 at the parent and an employee earning $80,000 at a subsidiary each receive $12,000. You cannot fund 25% for the owner at the parent and 5% for warehouse workers at a subsidiary. That is the discrimination the aggregation rules exist to prevent.

Each entity contributes for and deducts the contributions made on behalf of its own employees. If Subsidiary B pays a worker $60,000 and the group rate is 10%, Subsidiary B contributes $6,000 and takes the deduction on its own return. Across the whole group, total deductible contributions can’t exceed 25% of aggregate compensation paid to eligible employees.

If any owner in the structure is self-employed rather than a W-2 employee, the contribution math for that person runs differently, because the contribution reduces the compensation base it’s calculated on. The deduction goes on Form 1040, Schedule 1, not on Schedule C — a common filing error the IRS specifically flags.⁷

The Form 5305-SEP “No Other Plan” Trap

The standard IRS model SEP document, Form 5305-SEP, forbids the employer from maintaining any other qualified retirement plan in the same year. That includes 401(k), profit-sharing, and defined benefit plans. Because the controlled group is a single employer, a 401(k) at one subsidiary disqualifies every entity in the group from using Form 5305-SEP.⁸

If your structure includes even one entity with an existing qualified plan, there are two paths. Terminate the other plan before adopting the SEP, or use a prototype or individually designed SEP document instead of Form 5305-SEP. A prototype SEP avoids the blanket prohibition but still has to satisfy nondiscrimination requirements across the whole group.

Contribution Deadlines

SEP contributions have to be deposited into employee SEP-IRAs by the due date of the employer’s federal income tax return, including extensions.⁸ For a calendar-year corporation that’s typically March 15, or September 15 with an extension. Sole proprietors and partnerships generally have until April 15, or October 15 with an extension.

The flexibility is real: you can wait until well after year-end to decide whether to contribute and at what rate. But miss the filing deadline without an extension and you lose the deduction for that year. The contribution can still be made; it just moves to the following year’s return.

Every Contribution Is Immediately Vested

Every dollar contributed to a SEP-IRA belongs to the employee at the moment of deposit. SEPs don’t allow vesting schedules. The employee owns the account and can roll it over or withdraw it at any time, subject to the normal early withdrawal penalties before age 59½.⁸

For a holding company with high turnover at operating subsidiaries, that changes the cost math. Unlike a 401(k) with graded vesting, a SEP contribution is a permanent expense. An employee who leaves after a year keeps 100% of what was funded on their behalf.

Notices and Recordkeeping

A SEP established on Form 5305-SEP has no annual return required by the IRS or Department of Labor.⁹ That simplicity is part of the appeal. But the plan document has to say clearly that it covers all employees of the aggregated group, not only the adopting entity’s workforce.

When Form 5305-SEP is used, the employer must give every eligible employee a copy of the form and its instructions, plus disclosures noting that other IRAs may offer different terms, that the administrator will provide any amendments within 30 days, and that employees will receive written notice of employer contributions by January 31 of the following year.⁵ For a group with employees at multiple subsidiaries, someone needs to own the process of distributing those notices to every eligible worker at every entity.

On payroll reporting, employer SEP contributions for W-2 employees aren’t included in Box 1 wages, but the “Retirement Plan” box in Box 13 has to be checked.⁵ Group records should include ownership documentation and organizational charts that substantiate the controlled group or ASG analysis, because those are the primary defense in an audit.

Fixing an Excluded-Employee Failure

The classic SEP failure in a holding company is excluding eligible workers at a subsidiary the owner didn’t realize was part of the group. The IRS has a defined correction path, and using it is not optional.

The employer has to open a SEP-IRA for each excluded employee and make corrective contributions equal to the same percentage of compensation other employees received, for every year the person was left out. Those makeup contributions must include an adjustment for missed earnings through the correction date. If actual investment returns can’t be calculated, a reasonable interest rate is allowed, such as the rate used in the Department of Labor’s Voluntary Fiduciary Correction Program calculator.⁶

You can’t reduce other employees’ SEP-IRA balances to fund the fix. The cost falls entirely on the employer. Minor operational errors can be handled through the IRS Self-Correction Program without a filing, as long as you act promptly.¹⁰ More significant failures, or ones discovered years later, generally require the Voluntary Correction Program, which involves a filing and a user fee.

1
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
2
GovInfo. 26 U.S.C. 414 – Definitions and Special Rules
3
Office of the Law Revision Counsel. 26 U.S.C. 1563 – Definitions and Special Rules for Purposes of Section 1561
4
Office of the Law Revision Counsel. 26 U.S.C. 318 – Constructive Ownership of Stock
5
Internal Revenue Service. Simplified Employee Pension Plan SEP
6
Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating
7
Internal Revenue Service. Self-Employed Individuals: Calculating Your Own Retirement Plan Contribution and Deduction
8
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
9
Internal Revenue Service. SEP Plan Overview
10
Internal Revenue Service. Correcting Plan Errors: Self-Correction Program (SCP) General Description