Which employees are eligible to participate in my SEP plan?
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 $600 in compensation (in 2016 - 2020) from your business for the year.
Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.
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.
My spouse and I own our business. Must we both meet the SEP plan eligibility requirements to receive a plan contribution?
Yes. Each of you must separately meet the plan eligibility requirements to participate.
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 your 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 continue your participation in the plan.
What is the 3-of-5 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 (as long as the employee has satisfied the other plan eligibility requirements). This is the most restrictive eligibility requirement allowable. You can choose to use less restrictive participation rules in your plan, such as allowing employees to participate immediately after they start work or after a shorter period of employment (for example, after working for only 1 year).
If you use the 3-of-5 rule, you must count any work, no matter how little, in each of the prior 5 years. Use plan years (often the calendar year), not years based on the date the employee started working for you.
Example: Your SEP plan uses the 3-of-5 eligibility rule, uses a calendar year and has no age or compensation requirements. To be eligible for a contribution for 2019, an employee must have worked for you for any length of time in any 3 years in the 5-year period from 2014 to 2018. An employee who worked for you for two months in 2014, 2016 and 2018 must share in the SEP contribution made for 2019.
If you didn’t include an employee who worked for you in 3 out of the last 5 years, or if you didn’t follow your SEP plan’s participation requirements, find out how you can correct this mistake.
Is my new employee eligible to participate in our SEP plan immediately?
It depends on your SEP plan’s eligibility requirements. Review your plan document to determine the plan’s eligibility requirements.
If our SEP plan document includes the 3-of-5 eligibility rule, do we have to make a 2019 SEP plan contribution for an employee who was hired in December 2016?
Yes, if the employee meets all the other eligibility requirements of your plan, a SEP contribution is required for 2019 for any employee who worked for you for any length of time in 2016, 2017 and 2018.
Years are counted based on the plan year (usually the calendar year), not from the date the employee started working for you.
If our SEP plan’s only eligibility requirement is age 21, can we prorate an employee’s compensation from the date he turns 21 for his SEP contribution for that year?
No. You must base the employee’s SEP plan contribution on the employee’s entire plan-year compensation.
Our SEP plan requires employees to earn at least $600 in compensation for the year to participate in the plan. Can we prorate an employee’s compensation from the date he earns more than $600 in the year for that year’s SEP contribution?
No. Once the employee earns at least $600 in 2020 (and 2019) in a year and meets any other plan eligibility requirements, you must base the employee’s SEP plan contribution on the employee’s entire plan-year compensation.
Which categories of employees may I exclude from my SEP plan?
You may choose to exclude employees who are:
- covered by a union agreement if retirement benefits were bargained for in good faith by you and the employees’ union; or
- 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 who should have 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 plan if the employee is unable or unwilling to establish a SEP-IRA.