SEP IRAEligibility
Ok I need some help b/c I’m getting different answers from the support department at various MF’s.
I have a client husband and wife that started a business in 10/06 they brought the first employee on in 1/07.
They want to fund a SEP for Mr and Mrs for 08 but just for them.
My understanding so far is they can b/c they can make the eligibity requirments 2 or 3 years. But that is where my question lies. What constitutes a year of service. One specialist tells me it is a calender year basis another tells me it is any calender year the employee earns $500. So in other words you have an employee that starts today and by 12/31 earns $500 they have earned 1 year of service. Is that accurate.
Another was telling me it is measured as of the date you sign the 5305.
My next question is if they only need to make a 2 years of service to make it available for them and not the employee for 2008 can they then in 2009 revise the SEP for a 3 yr eligability and then exclude the employee again for 09′ – is that a DOL no no?
Could they do a SEP this year then switch to a SIMPLE for 09?
Sorry for all the questions but I’m getting so many different answers.
Permalink Submitted by BruceM on Thu, 2008-12-04 17:48
For a SEP, ALL employees (including the owner-employees) must be eligible for SEP contributions who are
1. >21 years old
2. Have worked for the employer for any 3 of the past 5 years. The IRS does not have a minimum here…it could be one day for one dollar and still count as a work year
3. The employee earns at least $500 this year (2008…it goes to $550 in 2009)
The applicable publications (below) do not say that the years of service must be during a period when the plan was offered. Because SEP’s are offered on a year to year basis, this precondition would make no sense, as the employer would have to exclude all employees in years 1 through 3. And if they are using the IRS model 5305 SEP, it must be on a calendar year basis
SEPs and SIMPLE IRA’s are offered by an employer on a year-to-year basis. There is no future commitment on the part of an employer who offers one of these in a given year. However, the employer does have certain notification requirements to employees by a certain date…see the links below.
Take a look at Pub 560 at http://www.irs.gov/pub/irs-pdf/p560.pdf
and the IRS description of the proceedure to establish a SEP at
http://www.irs.gov/retirement/article/0,,id=137850,00.html
BruceM