If your holding company owns 80% or more of a subsidiary, the IRS treats the parent and that subsidiary as a single employer for retirement plan purposes, and the SEP holding company controlled group rules require that your SEP cover every eligible employee across the entire group at the same contribution percentage. You cannot adopt a SEP at the parent and leave subsidiary workers out, and you cannot give the owner a 25% contribution while funding 5% for warehouse staff at an operating company. The 2026 per-person contribution cap is $72,000, and that cap applies to each eligible employee across the aggregated group.
When Your Entities Count as One Employer
Each entity in a holding company structure has its own EIN and payroll, which makes it look like each could run its own retirement plan. Under Internal Revenue Code Section 414, entities with common ownership or operational ties are treated as a single employer for SEP eligibility, contributions, and nondiscrimination testing.1GovInfo. 26 U.S.C. 414 – Definitions and Special Rules The analysis runs through three doors: controlled group status under Section 1563, affiliated service group status under Section 414(m), and family attribution under Section 318.
Parent-Subsidiary Controlled Group
This is the typical holding company fact pattern. 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.2Office of the Law Revision Counsel. 26 U.S.C. 1563 – Definitions and Special Rules for Purposes of Section 1561 The chain extends: if your 80%-owned subsidiary itself owns 80% of another company, that company joins the group too.
Brother-Sister Controlled Group
Where the same small group of owners controls multiple companies that don’t own each other, a brother-sister group forms when five or fewer individuals, estates, or trusts own at least 80% of each company and have identical ownership of more than 50% across them. Identical ownership counts only each owner’s smallest percentage across the entities. An owner holding 60% of Company A and 40% of Company B contributes 40% to the identical ownership test.
Combined Group
A combined group appears when three or more entities link through both a parent-subsidiary and a brother-sister relationship. In complex holding structures, the parent owns some subsidiaries outright and shares ownership of others with the same group of individuals.
Affiliated Service Groups
When ownership falls below 80%, the affiliated service group rules under Section 414(m) can still pull entities together. They target service businesses (healthcare, law, accounting, engineering, consulting, architecture) where owners commonly split operations across entities. An ASG forms when a “first service organization” is linked to an “A-organization” that holds an ownership interest and performs services for or alongside the FSO, or a “B-organization” that performs a significant portion of its work for the FSO, does work historically done by employees in that field, and is at least 10% owned by highly compensated employees of the FSO or its A-organizations. If your subsidiaries operate as separate service firms, these rules can create single-employer status even without an 80% ownership link.
Family Attribution
Ownership for these tests is not limited to what you hold directly. Under Section 318, you are treated as owning stock held by your spouse, children, grandchildren, and parents.3Office of the Law Revision Counsel. 26 U.S.C. 318 – Constructive Ownership of Stock A husband who owns 100% of Company A and a wife who owns 100% of Company B are each treated as owning the other’s shares, creating a brother-sister controlled group. The same logic reaches a parent and adult child who each own separate businesses, and there is no exception for family members uninvolved in the other’s company. Attribution does not chain: stock attributed from you to your spouse cannot then be re-attributed from your spouse to a third person. The direct family circle is still wide enough to catch most holding company arrangements.
What Single-Employer Status Does to Your SEP
Once the aggregation rules bring the entities together, every rule the SEP applies runs across the whole group.
Eligibility Across Every Entity
An employee of any entity in the group qualifies if they are at least 21, have 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.4Internal Revenue Service. Simplified Employee Pension Plan SEP The $750 figure is adjusted for cost of living. The three-of-five rule counts any period of employment in a year, no matter how brief: a worker employed one week in January gets credit for that year. Service at any entity in the group counts, so an employee who worked at Subsidiary A for two years, took a year off, then joined Subsidiary B has three years of service.
Leased employees also count. Workers supplied by a staffing agency for an extended period may need to be treated as employees for SEP eligibility purposes.5Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating
One Contribution Rate for Everyone
SEP contributions are employer-funded; employees cannot contribute to a SEP-IRA themselves. The 2026 maximum for any individual is the lesser of 25% of compensation or $72,000, and only the first $360,000 of an employee’s compensation enters the calculation.6Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
The holding company rule is that the contribution percentage must be uniform across every eligible employee in every entity. Choose 15%, and the employee earning $80,000 at the parent and the employee earning $80,000 at a subsidiary each receive $12,000. You cannot run 25% for owners at the parent and 5% for staff at an operating subsidiary. That is precisely the discrimination the aggregation rules exist to prevent.
Each entity funds and deducts the contributions for its own employees. If Subsidiary B pays a $60,000 worker and the group’s rate is 10%, Subsidiary B deposits $6,000 and takes the deduction on its own return. Group-wide, total deductible contributions cannot exceed 25% of the aggregate compensation paid to all eligible employees.
The Form 5305-SEP Trap for Groups With Existing Plans
The IRS model SEP document, Form 5305-SEP, contains a restriction that catches many holding company owners: an employer using this form cannot maintain any other qualified retirement plan in the same year. That includes 401(k), profit-sharing, and defined benefit plans. Because the group counts as one employer, a 401(k) at one subsidiary disqualifies every entity in the group from using Form 5305-SEP.7Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
If any entity in your structure already has a qualified plan, your choices are to terminate that plan before establishing the SEP, or to use a prototype or individually designed SEP document instead of Form 5305-SEP. A prototype SEP does not carry the blanket prohibition, but the document still has to satisfy nondiscrimination requirements across the entire controlled group.
The plan document, whichever form you use, must state that it covers all employees of the aggregated group rather than just the adopting entity’s staff. Ownership records and organizational charts substantiating the controlled group or ASG analysis are the primary defense in an audit, so keep them with the plan file.
Fixing the Most Common Mistake
The failure that holding companies run into most often is excluding eligible employees at a subsidiary the owner did not realize was part of the controlled group. The fix is not optional.
You must 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 date of correction. If calculating actual investment returns isn’t workable, the IRS allows a reasonable interest rate, such as the rate used by the Department of Labor’s Voluntary Fiduciary Correction Program calculator.5Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating You cannot reduce other employees’ SEP-IRA balances to fund the correction; the cost falls entirely on the employer.
For minor operational errors caught quickly, the IRS Self-Correction Program lets you fix the problem without filing anything.8Internal Revenue Service. Correcting Plan Errors: Self-Correction Program (SCP) General Description Larger failures or errors discovered years later may require the Voluntary Correction Program, which involves a filing with the IRS and a user fee.
On the other side of the limit, excess contributions are included in the employee’s gross income. The employee avoids a 6% excise tax on the excess by withdrawing it (plus earnings) before the due date of their personal return, including extensions. If the excess remains past that deadline, the 6% tax applies annually until corrected, and the employer may face a separate 10% excise tax on nondeductible excess contributions.7Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
Before adopting a SEP in a holding company structure, map every entity you have an ownership tie to (direct, through family attribution, or through service relationships), identify every employee at every entity who meets the age, service, and compensation thresholds, and plan the contribution budget around funding the same percentage for all of them. That exercise, done once at the front end, prevents the retroactive makeup contributions that make this one of the most expensive compliance mistakes a small holding company can make.