Participation Limits in SEPs

If you have a SEP, the law mandates that any employee who has reached age 21, has worked for you in at least three of the preceding five years, and has received at least $550 from you for the year (this amount may be adjusted for inflation) must be allowed to participate in your SEP. You can write your plan to be more generous if you like (for example, allow employees under 21 or with fewer than three years of service to participate).

You provide your employees with a SEP. Wilberforce Bream worked for you while in college in 2009, 2010, and 2011, never working more than 25 days in any particular year. In November 2012, he starts working for you full-time. He earns $2,000 from you in 2012. He turns 21 on December 31, 2012. You must make a SEP contribution for him for 2012 since he met the minimum age requirement, has worked for you in three of the five years preceding 2012, and has met the minimum requirement for 2012.

There are a couple of points you should remember about participation:

• You must contribute on behalf of all employees who meet the SEP eligibility requirements during the year in which the contribution is made, including those who no longer are employed by you and those who died during the year, even if you do not know their whereabouts.
• If former or current eligible employees close their IRAs prior to your contributions, you must establish another IRA on those employees' behalf. You must also send a notice to such employees at their last known address telling them that you established an IRA on their behalf. These rules also apply to eligible employees who refuse to open IRAs.