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Different eligibility for current vs future SEP participants?


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This question is skirted around in a few older threads. Thanks in advance for any opinions.

A new LLC w/ 4 partners is looking at adopting an SEP. Longest service w/ company is one year (prior plus current year), shortest is zero (current year only). Is there any mechanism (such as a prototype plan?) than can effectively establish different eligility requirements for current versus future employees? The intent would be for any and all employees on date of adoption to be immediately eligible but going forward require 2 or 3 years of service.

If no mechanism to accomplish this, what is legal exposure if adopt SEP w/ zero service requirement this year and change to one year on next January 1st (assume no employees other than partners until after January 1st)?

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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Rolling eligibility could result in operational discrimination if new employees are added to the employer's workforce. I do not recall seeing any "approved" prototypes that would allow all current employees to participate, while requiring future employees to satisfy a more stringent eligibility requirements.

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Bird, do you have anything that supports your scholarly opinion?

From the SIMPLE, SEP, and SARSEP Answer Book (10th Ed)

Q 2:51 May an employer amend its plan each year to lengthen the service requirement for eligibility?

Yes. It should be noted, however, that if new employees are added to the workforce, the successive amendments are likely to result in prohibited discrimination under Code Section 408(k)(3). That may be so because the present employees who are highly compensated employees could not meet the eligibility requirements for new employees at the time the plan was originally established (see Q 2:53). Another way to achieve the same effect is to terminate the plan each year and establish a new plan. In either case, it might be prudent to seek written assurances from an attorney familiar with the Employee Retirement Income Security Act of 1974 (ERISA) or submit a request to the IRS for a private letter ruling on such a scheme. [Rev Rul 73-382, 1973-2 CB 134; Rev Rul 70-75, 1970-1 CB 94]

Note. Code Section 414(o) provides that the Secretary of the Treasury shall prescribe such regulations as may be necessary to prevent the avoidance of any employee benefit requirement listed in Code Section 414(m)(4) or 414(n)(3). Both of those subsections refer to SEPs.

The employer must provide a copy of the amendment and a clear explanation of the amendment's effect to employees. A failure to clearly explain the effect of the amendment may subject the plan to the full reporting and disclosure requirements of ERISA (see Qs 4:5, 4:15).

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Mmmm, I'm not sure that quoting from your own book counts as a cite, but I'll bite. [ :rolleyes: It counts - gsl]

As I read it, 408(k)(3) is directed at the allocation of contributions in a year (i.e. pro-rata or integrated is OK). Subsection (A) would have to be the place that you're saying is a catch-all for non-discrimination, but my argument is that there is no place in the Code or Regs addressing SEPs that is as clear-cut about prohibiting an amendment or series of amendments as there is in the 401(a)(4) regs (I don't remember the exact cite).

I don't follow the references to 414(m) and 414(n)(3); sorry if I'm dense.

Ed Snyder

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Bird, aside from 401(k)(6) being sufficient authority, I think we almost agree.

But I'd rather be safe (get a PLR). If there was no discrimination [408(k)(6), I believe], the employer could possiby get a plan provision approved that allowed all current employees to participate or that provided a rolling eligibility scheme. Rolling eligibility (as you suggest) is not explicity prohibited. But neither is it explicity allowed.

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