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 $450 from you for the year (the amount for 2001 and 2002; this
amount may be adjusted periodically 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
You provide your employees with a SEP. Wilberforce Bream
worked for you while in college in 1998, 1999, and 2000, never
working more than 25 days in any particular year. In November
2001, he starts working for you full-time. He earns $2,000 from
you in 2001. He turns 21 on December 31, 2001. You must make a
SEP contribution for him for 2001 since he met the minimum age
requirement, has worked for you in three of the five years
preceding 2001, and has met the minimum requirement for 2001.
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.