SEP-IRA & form 5305-SEP

[OldJack]

S-corp organized in year of 2005 with only 1 shareholder/employee (and no other employees) wants a SEP-IRA plan and contribution. However, in 2006 the S-corp will have other full time employees.

How to fill out form 5305-SEP to allow shareholder/employee to have contributions in 2005 and 2006 but restrict 2006 other employees to 3 years of service requirement? Is there a waiver of "years of service" that can be made for startup employees?

[Bird Legs]

Sep-ira

Believe Tax Tools Small Business program has a plan in it for this. You might want to
look there if this is available.

[Brad Imsdahl]

You can set the restriction at one year, so that all employees must work one full year before becoming eligible for a SEP. That way the owner could qualify for 2006 while all the other employees wouldn’t qualify until 2007.

[OldJack]

Believe Tax Tools Small Business program has a plan in it for this. You might want to
look there if this is available.

I don't have the program tax tools... could you check further for me as to what the program does?

[veritas]

S-corp organized in year of 2005 with only 1 shareholder/employee (and no other employees) wants a SEP-IRA plan and contribution. However, in 2006 the S-corp will have other full time employees.

How to fill out form 5305-SEP to allow shareholder/employee to have contributions in 2005 and 2006 but restrict 2006 other employees to 3 years of service requirement? Is there a waiver of "years of service" that can be made for startup employees?

There is no way to have different contribution requirements. What you do for the owner you must do for everyone else.

[OldJack]

There is no way to have different contribution requirements. What you do for the owner you must do for everyone else.

But you can change the form 5305-SEP years of service by amending your plan with a new form 5305-SEP.

[ChEAr$]

the form

But Jack, doesn't the plan trustee take care of all the paperwork?
Or at least draw it up and send it for signatures?

At least T Rowe Price did for my plan.

[OldJack]

But Jack, doesn't the plan trustee take care of all the paperwork?
Or at least draw it up and send it for signatures?

At least T Rowe Price did for my plan.

The T Rowe Price plan is probably an approved prototype and NOT the form 5305-SEP plan. The employer in most cases simply fills-out form 5305-SEP, gives signed copies to employees, and contributes to employee IRA accounts either setup by the employee or the employer.

Responsibility for plan administration is that of the employer/sponsor. The trustee/custodian's only responsibility is to report to the IRS and the employee participant the account transactions and balance. The trustee/custodian is NOT responsible for determining eligibility and appropriate contributions, that is the job of the plan administrator/employer.

[OldJack]

There is no way to have different contribution requirements. What you do for the owner you must do for everyone else.

I agree that you cannot discriminate!!! That is the key.

However, here are a few thoughts.

1. Years of Service - Your form 5305-SEP plan can state 3 years, but IRS pub 560, page 5, says "You can use less restrictive participation requirements than those listed,but not more restrictive ones." The 3 years is the max for exclusion not inclusion.

2. Years of Service - I believe that years with a related business such as a sole-proprietorship before incorporating as an S-corp would count as years of service. The term is not years of employment. This is just the opposite of the requirement that employees of related businesses must be included in the plan.

3. Eligibility - is determined each year for each employee of the business. Such determination is the responsibility of the plan administrator who also has the responsibility to amend or terminate the plan when needed.

4. Amend - The administrator can voluntarily amend the plan at any time by simply notifying all parties concerned including the trustee. Amendment of the plan does not terminate the IRA's for the individuals and their IRA accounts would continue to qualify as IRA accounts.

A). Conclusion: The form 5305-SEP should be able to state "3 years service" for eligibility, but the first year of the S-corp all employees could be considered eligible (even with less than 1 year service) as long as there is no discrimination. The second year of the S-corp the 5305-SEP still has 3 years stated but the administrator can determine all employees with 2 years of service are eligible as long as he does not discriminate. Therefore, anyone hired in the 2nd year would only have 1 year of service and could be excluded.

B). The alternative Conclusion: Each year the 5305-SEP form is amended and reissued with the correct years of service that matches the first 3 years of the life of the S-corp.

Your thoughts?

[ChEAr$]

True

The T Rowe Price plan is probably an approved prototype and NOT the form 5305-SEP plan. The employer in most cases simply fills-out form 5305-SEP, gives signed copies to employees, and contributes to employee IRA accounts either setup by the employee or the employer.

Responsibility for plan administration is that of the employer/sponsor. The trustee/custodian's only responsibility is to report to the IRS and the employee participant the account transactions and balance. The trustee/custodian is NOT responsible for determining eligibility and appropriate contributions, that is the job of the plan administrator/employer.

Yes Yes, I know all that. But T Rowe DID send me all the paperwork and if i had had
any other employees (besides myself) I would have simply duplicated them for
employees.

However I'm too cheap to hire employees. (grin)