SEP for employee

[Kram BergGold]

My Schedule C client has a SEP.
My client has had the same employee in 2006, 2007 and 2008. Am I correct that 2009 will be the first year my client has to fund a SEP for the employee. It is the year following 2 years of service.

[ChEAr$]

Look

My Schedule C client has a SEP.
My client has had the same employee in 2006, 2007 and 2008. Am I correct that 2009 will be the first year my client has to fund a SEP for the employee. It is the year following 2 years of service.

to the adoption agreement.

[Kram BergGold]

Original post was incorrect

The standard SEP document says employees have to be covered when they have performed services in the 3 preceding years. So if employee started work in 2006 then 2009 would be the first year the employer has to cover him. I asked this question because years ago I read this incorrectly and thought coverage started in year 3 of employment rather than year 4 and I justed wnated confirmation that I am now reading the rules correctly.

[BOB W]

What you are saying doesn't sound correct. I believe the three years is a look back period to determine if the employee has earned $5,000 or more. I will check it out and get back to you.

ADDED> http://www.irs.gov/retirement/articl...111403,00.html

There is no waiting period in a standard plan...????


SORRY > I WAS THINKING "SIMPLE"

[John of PA]

3ed year is first year of SEP

Yes correct, 09 would be the first year that a SEP account is opened for that employee and funded, assuming they made over 600 dollars each year.

[Bees Knees]

Well that depends. How many years did the sole proprietor have to wait until being eligible to do a SEP? The three year rule is the longest you can wait to cover people under a SEP. But you can do it after 2 years, or after 1 year, or right away.

It the sole prop got his SEP in year one, then any and all employees would also have to get their SEP in year one.

[Kram BergGold]

Bees?

Are you saying that if i were in business for 10 years with no employees and had a SEP all those years and then hired someone that they would be covered immediately? I always thought each employee only qualified after working the requisite number of years.

[Bees Knees]

I always thought each employee only qualified after working the requisite number of years.

You have to look at your SEP agreement that you made with yourself when you first opened your SEP. If that allowed you to do a SEP in year one, then your employees must also be allowed to have a SEP in year one. The three year rule is the longest you can make people wait (including yourself).

Of course, that does not mean you can't change the policy in later years. If you had a SEP for ten years, then hired an employee, you could change the policy and say under your new SEP plan, everyone now has to wait three years.

What you can't do is start a new business, do a SEP for yourself in year one, but then make all other employees wait three years. If you get the SEP in year one, your employees must get the SEP in year one.

[Bees Knees]

Note what IRS Pub 560 has to say on page 5:

Eligible employee. An eligible employee is an
individual who meets all the following require-
ments.
• Has reached age 21.
• Has worked for you in at least 3 of the last
5 years.
• Has received at least $500 in compensa-
tion from you for 2007. In 2008, the $500
amount remains unchanged.
Tip: You can use less restrictive partici-
pation requirements than those listed,
but not more restrictive ones.