In Employee Plans News, Issue 2013-2, June 24, 2013, the IRS provides guidance on SEP Plan eligibility requirements. Here is what the IRS said:
Question: Which employees must participate in my company’s SEP plan?
Check your SEP plan document for your plan’s specific eligibility requirements. If your SEP plan has the most restrictive eligibility requirements the law permits, your company would only make a plan contribution for employees who have:
• reached age 21,
• worked for your company in at least 3 of the last 5 years, and • received at least $550 in compensation from your company for the year (subject to annual cost-of-living adjustments in later years).
However, your SEP plan may use less restrictive requirements. For example, you could allow employees to participate who:
• are at least age 18, and • earn at least $550 for the year.
Question: What is the 3-of-5 eligibility rule?
The 3-of-5 eligibility rule means you must include any employee in your plan who has worked for you in any 3 of the last 5 years. SEP plans can choose not to use the 3-of-5 eligibility rule. Instead, your SEP plan may allow employees to participate immediately or after a shorter period of employment (for example, after working for only 1 year). If you use this 3-of-5 eligibility rule, you must count any service, no matter how little, in the 5 years immediately before the current year.
Example: If your SEP plan uses the 3-of-5 eligibility rule and has no other conditions for participation, you must make a 2013 plan contribution for an employee who has worked for you for any length of time in any 3 years from 2008 to 2012.
Question: If we use the 3-of-5 eligibility rule, do we have to make a 2013 SEP plan contribution for an employee who reached his 3-year employment anniversary on March 15, 2013?
No. If your SEP plan uses the 3-of-5 eligibility rule, a SEP contribution isn’t required for the employee until the year that contains his 4-year anniversary of employment with your company. For the 3-of-5 eligibility rule, only plan years are counted, not years based on the date the employee started working for you. If this employee performed any service in any 3 years from 2009 through 2013, and meets any other plan eligibility requirements in 2014 (for example, age or compensation requirements), you must make a 2014 SEP contribution for the employee.
Question: If our SEP plan’s only eligibility requirement is age 21, can we prorate an employee’s compensation from the date he turns 21 in 2013 for his 2013 SEP contribution?
No. You must base your 2013 SEP plan contribution for the employee on his entire 2013 plan-year compensation.
Question: Our SEP plan requires employees to earn at least $550 in compensation for 2013 to participate in the plan. Can we prorate an employee’s compensation from the date he earns more than $550 in 2013 for his 2013 SEP contribution?
No. Once the employee earns at least $550 in 2013 and meets any other plan eligibility requirements, you must base his 2013 SEP plan contribution on his entire plan-year compensation.
Question: Are the eligibility requirements the same for all employees in a SEP plan, including owners?
Yes. The eligibility provisions stated in the SEP plan document must apply equally to owners and employees.
Question: If my spouse and I own the business we work for, must we both meet the SEP plan’s eligibility requirements to receive a plan contribution?
Yes. Each of you must meet the plan’s eligibility requirements to participate in the plan. For example, if your plan uses the 3-of-5 eligibility rule, even if you’re eligible for a 2013 SEP contribution, your wife isn’t eligible if she only worked in 2011 and 2012 for the business because she didn’t meet the 3-of-5 eligibility rule.
Question: Is my new employee eligible to participate in our SEP plan immediately?
Maybe, if your SEP has no service requirement and the employee meets any other eligibility requirements stated in your SEP plan document. Review your plan document to determine the plan’s eligibility requirements.
Question: 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 the 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 participate in the plan.