SEP IRA covering employees

[NotEasy]

One of the rules that an employee has to be covered by a company sponsored SEP_IRA is:

"Have at least 3 years of service in last 5 years"

But how do they count this? If an employee started working for the company in Jan 2010, when should he started to be covered?

Thanks.

[New York Enrolled Agent]

One of the rules that an employee has to be covered by a company sponsored SEP_IRA is:

"Have at least 3 years of service in last 5 years"

But how do they count this? If an employee started working for the company in Jan 2010, when should he started to be covered?

The code at §408(k)(2) doesn't use your language - i.e. "at least 3 years of service ...".

If the employee performed services during any of these years and received at least the minimum compensation for that year, they are covered. For tax years 2009-2011, the employee must have earned at least $550 in compensation. Basically, the starting date is irrelevant - if the employee started in January or June, the test is still the amount of compensation.

[NotEasy]

The code at §408(k)(2) doesn't use your language - i.e. "at least 3 years of service ...".

If the employee performed services during any of these years and received at least the minimum compensation for that year, they are covered. For tax years 2009-2011, the employee must have earned at least $550 in compensation. Basically, the starting date is irrelevant - if the employee started in January or June, the test is still the amount of compensation.

Hi NYEA, thank you for your reply.

About the "at least 3 years of service", I think that's what the IRS website says:

"Who is an eligible employee?
An eligible employee is an individual who meets the following requirements:
attained age 21;

has worked for the employer in at least 3 of the last 5 years;

has received at least $550 in compensation from the employer for the year (subject to annual cost-of-living adjustments in later years).

The employer may use less restrictive requirements to determine an eligible employee."

[John of PA]

To answer the original question, if the employee started Jan 2010 and otherwise meets the critieria, the employer must include them in the SEP for 2012.

[JohnH]

And that applies even if the employee no longer works there at the end of 2012, as long as they had earnings in 2012 and meet the other criteria.

I had a situation one time where a client had to put money into the SEP of a 3-year employee they had fired for embezzlement in February of the year in question. Otherwise they would have had to forego SEP contributions for all employees. Talk about an angry client...

[New York Enrolled Agent]

To answer the original question, if the employee started Jan 2010 and otherwise meets the critieria, the employer must include them in the SEP for 2012.

John

I believe the code says at least 3 of the immediately PRECEDING 5 years. An employer can always relax the requirement but I don't believe 2012 would count as one of the years if 2012 is the contribution year. If the employee started in 2010, they would have worked for only two of the 5 preceding years.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs

Proposed Reg. §1.408-7(d) contains an example that is also consistent with the use of "preceding".