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Rolling eligibility - an option?


Guest jaturner
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Guest jaturner

Discussions in other posts have indicated broad interest exists for funding new SEP plans immediately for all existing employees, while using the maximum service requirement for future employees. Some prototypes allow this (ie, Schwab), but 5305-SEP does not specifically do so.

We have seen discussions of "rolling eligibility", "dual eligibility", potential amendment techniques, possible determination of discrimination, etc. Some of the posts appear to exhibit at least minor disagreement, illustrating the confusion that exists. A comprehensive example might help resolve some of the uncertainty while also providing a means to illustrate where problems can or actually do occur.

Does the following scenario create any issues, whatever? It includes some wrinkles to throw in additional possibilities for adverse consequences.

Company desires to launch an SEP. The owners want to fund it in the first year for current owners and employees, but use a 3 year wait for future employees. All current employees and owners have at least one year of service in prior years. Form 5305-SEP is used. No PLR is sought.

1. Year 1:

a. Company adopts plan early in year with a 3 year service election.

b. Company realizes later, before any contributions occur, the plan cannot be funded for anyone for three years.

c. Plan is amended to provide a 1 yr service requirement.

d. Plan is funded. There were no new hires this year. Every employee is eligible and receives a contrib.

2. Year 2:

a. Plan is amended to require a 3 year service period.

b. The plan is not funded this year, to avoid potential discrimination if a new employee were to be hired.

c. A new employee -IS- hired this year, sometime after the amendment requiring 3 years of service is made.

3. Year 3:

a. Plan is funded using same percentage for all eligible employees (those having 3 prior years of service).

All employees who received a contrib in year 1 get a contrib. The employee hired in yr 2 does not.

This scenario seems to embody all of the cautions expressed in other posts. No discrimination appears to have occurred because all HCEs met the originally established 3 year service requirement during every year when contribs actually occurred, except during year 1 which itself seems perfectly valid. In year 3, all participants including owners had at least three years of prior service (year 1, year 2, and the year before the plan was established).

Does this scenario avoid all possible adverse consequences? If not, where does a problem occur and is it potential or real?

Note that this example does, however, omit all contributions in one year. Thus, if completely valid, it does not fully satisfy every case that can occur.

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You are fine in each of these instances. It is true that SEP prototypes provided be fund companies may provide additional flexibility that the Form 5305-SEP from the IRS.

Your step 2 appears to be overkill. There is nothing nondiscriminatory about funding the plan as long as the funding is uniform per the written terms of the arrangement. The IRS has issued Regs stating that a decreasing rate of contribution as salary increases is also deemed uniform.

Also, there are no 411(d)(6) considerations for SEP plans. Each year, the employer funds the traditional IRAs of the employees under a SEP or they do not. Also, each year, the employer has until the SEP filing deadline (including extensions) to amend the plan for eligibility and any other criteria.

I am actually trying to determine what issues you are referring to.

Hope this helps.

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