SEP IRA Formation when an employee refuses to participate

Submitted by Mary Jean Wenzel on Wed, 2023-03-08 21:30

What recourse does an employer have who wants to set up a SEP but one employee refuses to participate. The employee says “he doesn’t want anything to do with it.”
The employer has three full-time employees all of whom qualify to participate. Employees are himself, his spouse and one additional employee. Can the employer still set up the plan and exclude the employee who refuses to participate?



Submitted by Alan - IRA critic on Wed, 2023-03-08 22:46

If the owners meet the 3 of last 5 year requirement, could that be used to exclude the employee?



Submitted by Mary Jean Wenzel on Thu, 2023-03-09 15:05

All employees meet the 3 of last 5 year requirement….the owners and the employee.



Submitted by Alan - IRA critic on Thu, 2023-03-09 15:59

Then employer should set up the SEP IRA for this employee and make SEP contributions to it. This would likely be done with the same custodian the employer uses.



Submitted by David Mertz on Thu, 2023-03-09 15:59

  • Does the employee understand that the only contributions are employer contributions, that the SEP-IRA requires no real involvement by the employee and that any money put into the SEP-IRA by the employer would be separate from the wages paid to the employee?  Nothing comes out of the employee’s pay.  The employee could take a distribution from the account immediately after the contribution is made, subject to income tax and possible early-distribution penalty.
  • If an eligible employee will not establish the SEP-IRA account to receive the SEP contributions from the employer, the employer must establish the account on the employee’s behalf to receive the required contribution.  The employee can then ignore the account, but because it will have no designated beneficiaries it will eventually become part of the employee’s estate when the employee dies.  (The employee could designate a beneficiary, but that would require the employee to become at least slightly involved.)


Submitted by Mary Jean Wenzel on Thu, 2023-03-09 17:46

The employee has been told all that you list in the first bullet point.  Whether he understands is another question.I will suggest to my client your second bullet point.Thanks for your responses.



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