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SEP Plan FAQs - Participation

Which employees are eligible to participate in my SEP plan?

All employees must be included in the SEP plan if they have:

  • attained age 21;
  • worked for your business in at least 3 of the last 5 years;
  • received at least $550 in compensation from your business for the year (subject to annual cost-of-living adjustments in later years).

You may use less restrictive requirements, for example age 18 or three months of service, to determine an eligible employee.

What is the 3-of-5 rule?

Your SEP plan can require employees to work for you in at least 3 of the last 5 years to receive an allocation under the plan. This is the most restrictive eligibility requirement allowable – you can have less restrictive participation rules. If you use this 3-of-5 rule, you must count any service, no matter how little, in the 5 years prior to the current year.

To be eligible for the 2014 year, an employee must have worked for you for some time in any 3 years in the 5-year period from 2009 to 2013. For example, an employee that worked for you for two months in 2009, 2012, and 2013 must share in the SEP contribution made for 2014.

If you didn’t include employees who worked in 3 out of the last 5 years in your SEP plan, or if you didn’t follow your SEP plan’s participation requirements, find out how you can correct this mistake.

See Employee Plans News - SEP Plan Eligibility Requirements (June 24, 2013).

Which categories of employees may I exclude from my SEP plan?

You may choose to exclude employees who are:

  1. covered by a union agreement if retirement benefits were bargained for in good faith by you and the employees’ union; or
  2. nonresident aliens who have no U.S. source compensation.

As discussed above, you may also choose to exclude employees who have not met the minimum requirements for age, time of service, or compensation received. 

If you excluded employees that should’ve been included in your SEP plan, find out how you can correct this mistake.

What happens if an employee elects not to participate?

An employer may establish a SEP-IRA for an employee who is entitled to a contribution under the SEP if the employee is unable or unwilling to establish a SEP-IRA.

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Page Last Reviewed or Updated: 25-Mar-2014